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Understanding the tax situation for your remote workers is no easy feat. Or, perhaps you’re a remote worker yourself and you want to understand your situation better. Either way, it’s important to understand the different tax requirements for remote workers in state, in neighboring states, or those living in different countries entirely. 

In this article, I’ll walk you through the implications of hiring remote workers, the tax implications of being a remote worker, and the most frequently asked questions on this topic. I’ll also point you in the direction of specialized services and resources to help you make your tax obligations easier, including partnering with an Employer of Record or global payroll service, or using specialized tax software. 

Understanding Employment Taxes for Remote Workers

Employment taxes for remote workers can be a complex topic, largely due to varying state regulations. Generally, an employee's tax liability and withholding are typically determined by their physical location, not the employer's.

This means that if a staff member is working remotely from a different state than the company's headquarters, employers may be obligated to withhold taxes based on the rates and rules of the employee's resident state.

However, some states follow what is known as the "convenience of the employer rule" where taxes are based on the employer's location regardless of where the employee works. Therefore, understanding the tax rules in each state is necessary to ensure compliance.

If an employee works in multiple states, tax apportionment (assigning a specific amount of corporate income tax to a particular state) might be required. Many states also have tax reciprocity agreements in place to prevent double taxation.

Despite the complexities, HR software can be helpful in automatically computing and withholding the correct amounts, thereby minimizing the risk of errors or non-compliance.

Different Types of Remote Workers

It’s important to remember that there are different types of remote workers, each with unique tax implications. Here are the most common types of remote workers and how their taxes are determined:

  • Employees who permanently telecommute work for a business located elsewhere geographically. Their taxation may depend on agreements between the countries or states they live and work in. 
  • Temporarily relocated employees may need to work in a different state for a business trip or a special project for a few weeks. Their taxation requirements will depend on the length of the trip and the specific states involved. They may be required to pay taxes in two states.
  • Digital nomads are constantly relocating, often across international borders. Their tax obligations can be complex due to multiple jurisdiction rules. 
  • Workers in co-employment arrangements, where an employer shares responsibility with an HR service provider. Their complex taxation requirements may be determined by the location of the employee and both co-employers. The legal responsibility for their tax and compliance requirements will be determined by their employment contract.
  • Independent contractors are self-employed and are responsible for their own taxes.

The Impact of Worker Location on Tax Obligations

The location of remote employees has significant effects on tax obligations for both the employer and employee. Companies must conform to tax laws not only where they're located, but also in the region where their remote worker resides. This might mean withholding income taxes for that state or paying into its unemployment insurance or disability funds. As organizations increasingly embrace remote work, understanding these distinctions is crucial.

The following sections delve into the specific obligations of employers versus employees and highlight the critical issue of employee misclassification and its tax implications.

Employer vs. Employee Obligations

For organizations employing remote workers, complying with tax obligations requires a clear understanding of the distinct responsibilities of employers and employees. 

Employers who hire remote workers are obligated to withhold and pay payroll taxes. It is the employer's responsibility to ensure that the correct withholding tax is applied based on the remote work location. This may involve withholding local or state taxes in addition to the federal income tax. Additionally, companies might need to contribute to state-specific unemployment insurance and workers' compensation funds.

Employees' are obligated to inform their employer of their correct and current work location for tax purposes. In addition, employees working remotely from different states may be required to file multiple income tax returns according to the state they live in. In some cases, remote employees might also need to pay local business taxes if their home is considered a place of business.

The Impact of Employee Misclassification on Tax Obligations

Employee misclassification occurs when a worker is incorrectly designated as an independent contractor instead of an employee, or vice versa. This distinction is crucial for tax purposes because it determines who is responsible for withholding and paying taxes. 

Misclassification can lead to significant tax implications for both parties:

For employers, misclassifying employees as independent contractors can result in owing back taxes, penalties, and interest for failing to withhold income taxes and pay employer payroll taxes. Additionally, it can affect eligibility for employee benefits and protections. 

For workers, being incorrectly classified can impact their tax liabilities, such as missing out on employer contributions to Social Security and Medicare. 

To avoid this potentially costly problem, organizations must rigorously assess worker roles and responsibilities to ensure accurate classification according to the guidelines set forth by the IRS.

To delve further into the complexities of classifying workers, read our summary of employee misclassification and how to avoid it.

Tax Implications of Hiring Remote Workers Across Borders

While hiring remote workers across borders broadens your talent pool, it also brings new tax implications with it. It’s important to consider the potential tax liabilities in the employee's place of residence, because companies may be responsible for meeting the respective country's tax and employment laws, which can be significantly different. 

Navigating tax codes and compliance with international regulations can be complex and more challenging for small businesses with limited resources. Hiring an employer of record (EOR) or global payroll provider can help manage these obligations effectively.

Evaluating the Tax Implications of Hiring Internationally

As an employer, you need to recognize that tax laws and compliance requirements differ drastically from one country to another, which extends to withholdings, social security contributions, and, more broadly, employee benefits. This could potentially impact an organization's net salary offerings, thus affecting the overall employment offer.

It’s also important to carefully consider the potential risk of accidentally creating a “permanent establishment” (PE) abroad. If a company employs a remote worker in a foreign country and this involvement exceeds certain parameters, a PE may be determined. This means the company now has a taxable presence in a secondary country, requiring them to pay corporate taxes in that country. 

Again, hiring a specialized tax professional is recommended before you embark on hiring remote workers internationally.

Required Documentation and Compliance

In terms of documentation, it is vital to keep accurate and compliant records of all remote work taxes. This includes detailed records of payroll, including the location of the employee during the period they earned the income. 

Businesses should monitor changes to their employees' residence status, knowing where they work, and for how long. In addition to communicating this need directly with any remote employees, HR professionals should also maintain employee contracts, tax forms, and copies of any relevant communications regarding location changes or work terms.

Complying with remote work tax rules means understanding the tax laws of different locations where employees reside. Regular tax audits and reviews are necessary to ensure that companies comply with regulations and avoid penalties. 

HR staff must be proactive and stay updated about any changes to tax legislations. If you’re short on HR resources internally, it’s crucial to involve a tax expert or legal counsel, especially for complex cases or interpretations of the law.

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Best Practices for Managing Cross-Border Employment Taxes

There are several steps you can take to make the process of managing cross-border employment taxes easier. 

First, spend time familiarizing yourself with the tax regulations and the labor laws of the countries where the employees reside, including income tax rules, social security (or the equivalent), and pension contributions. If your eyes are already glazing over or you feel this is above your head, turn to a professional for help! There are several helpful options in the Services and Resources section below. 

Keep detailed records and reports of all transactions to remain in legal compliance. Using payroll software that monitors against international tax laws can help automate this process, maintain accuracy, and reduce manual work.

Implement a consistent policy for all remote workers regardless of their location and maintain transparent communication about tax obligations. Any tax equalization or tax protection schemes should be clarified and included in the employment contract. 

Regularly conduct internal audits to ensure ongoing compliance. Anticipate changes to tax laws, especially with the rise in remote working situations resulting from the pandemic. 

To further simplify this complex process, consider partnering with an employer of record organization that already has expertise in these matters.

Understanding Your Tax Obligations as a Remote Worker

As a remote worker, you should be aware that you’re required to pay taxes on your income, just like any other employee. The location of your employer may also have tax implications for you. If your employer is located in a state other than where you live, you may be subject to income taxes in both states. Check on your state's tax regulations to understand your obligations as several states have reciprocal agreements that prevent double taxation.

If your employer doesn’t withhold taxes for your state, you're responsible for making these payments yourself. You can pay these taxes quarterly so you don’t have to pay a large amount at the end of the year. 

Understanding your tax obligations as a remote worker can be complex, so consider consulting with a tax professional to ensure you're meeting all of your tax responsibilities accurately.

Determining Your Tax Residency

Determining your tax residency is crucial when trying to understand remote work taxes. Generally, your tax residency is defined by where you are residing and working most of the year. 

You are considered a tax resident of a country if your primary home, economic interests, and personal ties are located there. Details vary from nation to nation, but if you spend 183 days or more within a tax year in a country, you're typically considered a tax resident. Understanding these tax rules is essential, as it affects your tax liabilities and obligations.

However, things can be a little more complex for remote workers who fall into the digital nomads category as they might work in different locations throughout the year. In these cases, it's advisable to consult a tax advisor to understand where your tax home is, especially if you oscillate between two or more countries. 

Borderless workers also need to track their whereabouts to provide proof of their physical presence. 

Navigating Double Taxation Agreements

Double taxation agreements are provisions between two countries aimed at eliminating obstacles to trade and preventing double taxation of income or capital. As remote work continues to advance, understanding these agreements is essential to prevent your employees from being taxed twice on the same income. Each agreement varies depending on the countries involved, so it’s essential to familiarize yourself with the specific agreements that are relevant to your business.

Employers should work closely with specialized tax consultants or in-house specialists to assist in avoiding potential double taxation pitfalls. Thorough knowledge of an employee's tax residency status and respective tax liabilities is necessary for companies to implement comprehensive tax strategies. 

Furthermore, since certain countries may require the filing of a tax return even without a tax liability, staying vigilant about tax compliance is key. 

Tax Deductions and Credits for Remote Workers

Prior to the 2018 Tax Cuts and Jobs Act, employees could deduct unreimbursed, work-related expenses; however, this is now only applicable to self-employed individuals or independent contractors. 

If you’re a self-employed, independent contractor based within the US, you can claim the following remote work tax deductions as business expenses: 

  • Home-office equipment (computers, phones, furniture, etc.)
  • Telecommunication costs (internet and phone service)
  • Utilities (electricity, gas, hydro, etc.)
  • Insurance
  • Business-related banking fees
  • Business license fees
  • Business meals
  • Work-related travel expenses
  • A portion of your rent or mortgage interest*

*Home office deductions consist of a proportion of housing expenses if you maintain a home office that is exclusively dedicated to your work. To calculate the correct percentage, you can use either the Standard Method or Simplified Method.

Scenario: Imagine your home office is 200 square feet and your house is 2,000 square feet.

Standard Method: Take 200 and divide it by 2,000. The total is 10%, meaning you percentage of your home used for your business is 10%. 

Simplified Method: Multiply your square footage by $5 per square foot (up to a maximum of 300 square feet). In this example, with a 200-square-foot office x $5/square foot, the total amount you can deduct as a home office business expense is $1,000 per year.

Services and Resources for Navigating Remote Work Taxes

Remote workers, and the organizations who employ them, should consider using specialized tax services and software to ensure compliance with all the tax regulations in play for the different jurisdictions where their employees live and work. 

By leveraging the services of specialized tax professionals, including EOR services and global payroll services, your company will gain the necessary tools and knowledge to navigate the tax season effectively and efficiently.

Employer of Record Services

EOR services can play a pivotal role in managing remote worker taxes. Their services include comprehensive management of tax obligations, ensuring businesses adhere to all regional laws and restrictions related to remote employment.

The fact that the EOR company assumes legal responsibility for remote workers makes them an attractive partnership for companies looking to hire international remote workers, since the EOR will manage all the complexities of withholding and reporting, ensuring correct statutory taxes and social security contributions while operating within each jurisdiction’s employment laws.

Working with an EOR is also advantageous because they can mitigate potential legal complications by staying informed of rapidly evolving international tax laws. EORs eliminate the daunting responsibility of companies to monitor and interpret tax regulations across several jurisdictions.

Using their in-depth knowledge and expertise, EORs ensure accurate, timely compliance, reducing non-compliance risks. As a result, using an EOR service frees organizations to focus on their core business functions, confident that their remote worker taxes are being expertly managed.

If you’re interested in hiring nearshore remote workers based in Canada, this list of the best Canadian EOR companies is worth reviewing.

Global Payroll Services

Similar to EOR services, global payroll services help businesses manage payroll for all employees, no matter their location, in a unified platform, simplifying processing and securing compliance with tax regulations. Capable of catering to different tax requirements across countries, a well-integrated system helps streamline the workflow, reducing errors, and ensuring accurate and timely tax filing for all remote employees.

Partnering with a reliable global payroll service offers real-time visibility of payroll costs, valuable analytics that help in decision-making, and payments in multiple currencies, creating a stress-free payment process for global teams.

In contrast to EOR services, however, global payroll providers do not assume legal responsibilities for your remote workers. Instead, their software is used to confirm compliance with international tax laws and maintain the accuracy of financial data. This automation ensures peace of mind and allows organizations to focus on their core business operations.

Tax Software

Tax software can greatly simplify the process of managing remote work taxes since it can automate various tax-related tasks, ranging from tax calculations to the preparation of tax documents. This automation is much more efficient and accurate than manually managing these tasks, which makes it easier to avoid tax errors.

Good business tax software also allows you to simultaneously manage tax rates across different jurisdictions, which is particularly beneficial for companies with remote employees spread across different cities and countries. In addition, by integrating your tax software with your HR systems, the tax software can use your existing employee data to automatically manage their tax-related matters. 

Government and International Resources

The IRS provides many resources to help companies manage their remote work taxes. Below are several links to point you in the right direction. 

Taxation Resources for US-Based Remote Workers

Here are several resources for US-based companies that have remote workers residing within the USA: 

Taxation Resources for Remote Workers Located Abroad

Here are several international tax resources to help US-based companies with remote workers based outside the USA, including in Canada or the European Union: 

Frequently Asked Questions

Here are some answers to popular FAQs you may also be wondering about:

If you work remotely where do you pay taxes?

In most cases, you’ll pay taxes in your country or state of residence, where you perform your work. However, if your employer is based in a different jurisdiction, you may also be subject to tax obligations there, depending on local laws and tax treaties. 

Always consult a tax professional to understand specific obligations, take advantage of potential credits or deductions, and avoid double taxation.

Do all US states charge a state income tax?

Currently, several US states do not charge an income tax on employee wages, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. 

However, while individuals living in New Hampshire and Tennessee don’t have to pay an income tax on their wages, these states do charge taxes on other forms of income.

It's important for residents and remote workers to double-check their specific state's tax laws for each taxation year, since tax laws may change over time.

What are the implications for employees temporarily working out of state?

Employees temporarily working out of state may face dual tax obligations: to their home state and the state where they are temporarily working, depending on each state's residency rules and tax laws. 

Some states offer credits for taxes paid to another state to avoid double taxation. The duration of the work and tax treaties between states can affect tax implications. I recommend consulting with a tax professional to understand the complexities of your unique situation.

What is the “convenience of the employer” rule and how does it affect remote workers?

The "convenience of the employer" rule determines if remote work is being completed out of necessity from the employer or for the employee’s convenience. If it's for the employee's convenience, the employee might owe taxes to the state where the employer is located, even if they work elsewhere. 

This rule affects remote workers by potentially subjecting them to double taxation—both in their state of residence and the state where the employer is based. However, many states don’t use the “convenience of the employer rule,” including Connecticut, New York, Nebraska, Pennsylvania, Delaware, Arkansas, and Massachusetts.

As always, seeking personalized advice from a tax professional is essential.

What is a reciprocal tax agreement?

A reciprocal tax agreement is an arrangement between two jurisdictions that allows residents of one jurisdiction to work in the other without being taxed by the non-resident jurisdiction. Instead, workers pay income taxes only to their home state. This agreement simplifies tax filing for cross-border commuters and avoids double taxation. 

It's important for workers and employers to know if their states have such agreements to ensure correct tax withholding and payments. Here’s a quick summary of the different reciprocal tax agreements in place at the time of writing:

  • Arizona has reciprocal agreements with California, Indiana, Oregon, and Virginia.
  • Illinois has reciprocal agreements with Iowa, Kentucky, Michigan, and Wisconsin.
  • Indiana has reciprocal agreements with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin.
  • Iowa has a reciprocal agreement with Illinois.

How long can an employee work remotely in another state without needing to pay extra taxes?

For most states, after 183 days of working within that state, you’ll be considered a tax resident. However, this tax residency duration varies significantly by state, with thresholds ranging from a single day to 183 days (approx. six months) within a calendar year. 

It's crucial to check the specific rules of the state in question, as exceeding these limits can result in tax obligations to that state. As always, consulting a tax professional is advisable.

How do taxes work for remote workers outside the United States?

For remote workers outside the United States, tax obligations depend on the tax laws of their country of residence and any tax treaties with the US. Typically, they’ll pay income tax in their country of residence on global income, including earnings from US-based employers. Some countries offer foreign tax credits to avoid double taxation. 

It’s vital to understand both local tax laws and the impact of any applicable international tax treaties. As always, consulting with an experienced tax professional is recommended.

Can you be double taxed if you work remotely?

Yes, remote workers can face double taxation if they live in one jurisdiction and work for an employer in another, and both jurisdictions tax the same income without agreements in place to prevent it. This can happen both domestically, between states, and internationally. However, many jurisdictions offer tax credits, treaties, or reciprocal agreements to mitigate double taxation. 

It’s important to consult a tax professional to navigate these complexities and minimize tax liabilities.

What strategies can help avoid double taxation for remote workers?

To avoid double taxation, remote workers can use strategies such as claiming foreign tax credits, using tax treaties, and taking advantage of reciprocal agreements between states or countries. Establishing tax residency in one jurisdiction, carefully planning the location and duration of remote work, and keeping detailed records of income and taxes paid are also crucial. 

I recommend consulting with a tax professional that’s familiar with domestic and international tax laws to receive personalized advice and strategies.

Do you pay more taxes if you work from home?

Working from home does not inherently result in higher taxes. In fact, remote workers may be eligible for home office deductions if they meet specific criteria set by tax authorities, potentially lowering their taxable income. 

However, the tax implications can vary based on local laws, the individual’s employment status, and whether they work in a different jurisdiction from their employer. Consulting a tax professional can help clarify personal circumstances and potential deductions.

How can a remote worker establish a new tax residency in a new state?

To establish a new tax residency in a different state, a remote worker must physically move and demonstrate intent to make the new state their permanent residence. This typically involves changing the address on official documents (ID, driver’s license, voter registration), opening local bank accounts, and spending a significant amount of time in the new state, often 183 days or 6 months. 

However, different states have varying requirements, so it’s crucial to review specific state laws and possibly consult a tax professional.

What states have the most lenient tax codes for remote workers?

The most lenient states for remote workers are those that have no state income tax, making them more attractive financially. To date, that includes Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Additionally, states that offer reciprocal tax agreements or have flexible residency requirements may also be seen as lenient, depending on the remote worker’s specific circumstances. 

Remember to always verify current laws, as tax codes can change.

How do taxable employee benefits work for remote workers?

For remote workers, taxable employee benefits, such as health insurance, retirement contributions, and any reimbursed expenses not exclusively used for work, are treated similarly to traditional office employees. These benefits are considered part of the employee's total compensation and may be subject to income and payroll taxes, depending on the type of benefit and tax laws. 

It's important to differentiate between non-taxable work-related reimbursements and taxable benefits to accurately report income and deductions.

What are the benefits of hiring remote team members?

Hiring remote team members offers several benefits, including access to a wider talent pool, increased diversity, and potential cost savings on office space and resources. It can also lead to higher employee satisfaction and retention by offering flexibility and work-life balance. 

Additionally, other benefits of remote teams include enhanced productivity and efficiency by allowing team members to work in environments that best suit their needs and by reducing commute times.

If you’re feeling intimidated by the idea of managing a remote team, don’t fret. You’re not alone. This article offers 27 tips for managing remote teams to give you your confidence back.

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Kim Behnke
By Kim Behnke

Kim Behnke is an HR Tool Expert & Writer for People Managing People. She draws on her 9 years of human resources experience and her keen eye for systematic processes to support her analyses of the top HR tools on the market. She is passionate about maximizing efficiencies and streamlining workflows to ensure internal systems run smoothly. Kim's HR experience includes recruitment, onboarding, performance management, training and development, policy development and enforcement, and HR analytics. She also has degrees in psychology, writing, publishing, and technical communication, and recently completed a Certified Digital HR Specialist program through the Academy to Innovate HR. When away from her desk, she can usually be found outside tending to her ever-expanding garden.