In March 2020 as the world shut down and many companies switched to fully remote work, few were thinking about the tax consequences of all these new teleworking employees. The pandemic has accelerated the move to remote work and with it the possibility that those employees can live anywhere they please. That could mean a higher standard of living and a lower income tax rate for the growing number of remote workers. But in some instances it could mean having to pay taxes for a place where they now neither live nor work — or even being taxed on the same income twice. Full-time remote workers can only make standard or itemized tax deductions available to all other taxpayers. Independent contractors can claim business expense deductions on tax returns.
However, if you are required to pay taxes, you will need to determine how much you owe and pay the appropriate amount. Several states have implemented laws requiring employers to reimburse reasonable and necessary business expenses incurred by employees in the course of their employment, including with respect to remote work. Fully remote opportunities have opened the door for U.S. workers to move further away from their employer’s offices, with 28 percent of U.S. workers planning to move more than four hours away from their employer’s office two years into the pandemic5. For example, query whether an employee who earns nonqualified deferred compensation in New York and then moves to Texas prior to payment can receive such payment without it being subject to New York taxes. In 2020, employees are free from state taxes in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Cash App Taxes (formerly Credit Karma Tax)
If you are not eligible to claim the foreign earned income exclusion, you may still be able to reduce your taxable income by claiming a foreign tax credit on your U.S. tax return. The foreign tax credit allows you to credit taxes that you have paid to a foreign government against your U.S. tax liability. To claim the foreign tax credit, you must have paid or accrued taxes to a foreign government on income that is also subject to U.S. taxation. Few would argue that every deduction, credit, exemption, or other preference in the federal tax code is good or desirable, but it would be even more difficult to argue that we would be better off with the inverse treatment. Federal deductibility is like a funhouse mirror, inverting and distorting the federal code in ways that fail to achieve the state’s policy goals.
While most taxes (unlike some fees) fund a broad array of services and cannot be understood as a strictly user-pays arrangement, there is at least some connection between the taxpayer and the expenditure of the funds. Taxpayers pay for the governance of the area where they work—a place from which they derive some direct benefit. Taxing people who barely set foot in a state, under a vague and inconsistently applied notion that they are availing themselves of the state’s market simply because their company has an office there, is bad tax policy. Imagine that a taxpayer purchased $10,000 worth of shares in 2001 and sold them for $20,000 at the start of 2021. Both the federal and state government would treat this as capital gains income of $10,000. The federal government offers preferential rates on long-term capital gains, while most states do not, instead taxing the gains at the ordinary rate.
Pay extra-close attention this tax season
Working remotely can be a boon or a bust for your taxes, depending on where you live. “At the end of the day, it’s a cost-benefit analysis. If somebody wants to work in Florida, there’s no income tax. But it can be a morass once you branch out to other states.” Klein, who advises several remote retailers, discussed how do taxes work for remote jobs how businesses can navigate these issues. Companies also face tax consequences when they employ workers who work remotely from different states. Today, however, remote working has changed how we work, in ways that state and local taxing authorities across the United States have been slow to adapt to.
This could mean being given a state tax credit or arranging which of the two states will collect state income tax from the individual. In order to be aware of and properly address such issues, employers need a method to properly track remote employees and where they are providing services, including when such work is on a long-term temporary basis. An employee may view a six-month jaunt as something their employer need not be aware of, but for some jurisdictions, this can be a sufficient time frame to implicate permanent establishment and other issues.
The Future Of Tax Policy For Remote Workers
The analysis tracked revenue growth between 2020 and 2022, first normalizing the data for industry performance to eliminate differences between high- and low-growth sectors. Check out the website of the Canada Revenue Agency for more information on the taxation of foreign income for Canadian taxpayers. To claim the foreign earned income exclusion, you must meet certain requirements, such as being a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year. In contrast, workers’ comp coverage is optional for private employers in Texas, and some other states have numerous exclusions. Employees in California also can claim benefits faster — just three days after an injury versus seven for Florida, Texas and most others.
- Pre-COVID-19, before everyone started telecommuting much more, there already was brewing controversy.
- A McKinsey Global Institute analysis of 800 jobs found that the ability to work remotely is highly concentrated in a handful of high-skill occupations and industries, including finance, management, professional services, and information technology.
- If your company is located in one of those states, you generally will pay taxes there (whether you ever physically set foot in it or not) unless your remote location is required by your employer.
- With arguments similar to those that would be raised later in Wayfair,2 TeleBright argued that taxing businesses on the basis of telecommuting employees would impose “unjustifiable local entanglements” and an “undue accounting burden” upon businesses employing telecommuters.
Almost a decade ago in Telebright Corp. v. Director, New Jersey Division of Taxation, 424 N.J. 384 (N.J. Super. Ct. App. Div. 2012), the New Jersey Superior Court’s Appellate Division affirmed that an out-of-state employer could be liable for the state’s corporation business tax (CBT) by virtue of one employee telecommuting from the state. California, she said, would tax his income because he was physically working there. Plus, when he filed his New York resident tax return, the state probably wouldn’t give him a credit for the taxes he paid to California.
People living outside the U.S. who work as independent contractors must remember to save money for their own taxes. Employers generally do not withhold any taxes from contractors or make payments to government entities on their behalf. Tax rates for contractors vary from country to country, so contractors should consult local guidelines for specific tax rates and savings tips. Without an EOR, most U.S. companies choose to treat international employees as independent contractors.
