What are the Tax Implications of Remote Working? (Everyone Needs to Read This)

Before you plan to work remotely, you may need to consider what that means to you in terms of tax. Since different states have different approaches to taxation, understanding your state approach will help you prepare well for taxation.

Although you have to look at taxation from different angles, knowing that working remotely may mean paying tax in two different states is good. If you are working for a company located in a different state from the one you reside in, chances are you will pay tax twice. That is why you need to know before deciding whether you want to work for a company in a different state.

Learn More about Tax Implications to Avoid Penalties

Understanding everything you need to know about taxation, whether working remotely or from the office, gives you confidence in filing your tax returns. Here is some of the information you need about your taxation approach and what that means to you.

Just know that by working from a different state from the employer’s home state, you may be creating a link. For instance, if the employer had no connection with the state where you are staying, it may become a problem. Then, in that case, you will become the focus of taxation in your state. So even though creating that link may not be something much, it is worth your consideration.

1. You May Create a Duel Citizenship Status

When you work and live in different states, you may create a state of dual residency. That may mean that while you are paying taxes in two different states, taxation will not be at the same time. Each state may have a different tax season from the other, and therefore you will have to file your tax report in one state at a particular time and for the other state at different periods altogether. Here is what may happen to you.

Full Time in the Different States

You have decided to move to a different state from your employer to save money if the state you are moving in with your family charges a lower income tax rate. That is because you want to save money on taxation. However, your employer may disagree with that kind of arrangement. That means you will work full time living in a different state and working in another one. Your employer will withhold taxes for your resident state, but you will not have to pay taxes for your state and the employer’s state.

Dual Residency

Dual residency is different from full-time work in another state. When it comes to dual residency, you will have to think about filing multiple tax returns and working articulate and when offsetting the proper credits. What that means is, you will have to think of the time limit allowed for you to work in any of the locations without the need to file an extra return. If you understand the concept well, then you can work around the tax exemption to reduce the amount of taxation on your side.

What About Changing the State of Residency?

When you move to a new state, it will be essential to prove your residency through a legal document. Some of the documents you can use include your voter registration, vehicle registration, and other legal documents, even the driver’s license. You will need such proof if you move to work in a new state. That will tell the authorities that you are living in that particular state and residing in the same. For that reason, you will only need to file your tax returns once.

Work Remotely from Home

When it comes to working from home, it depends on the kind of work you do to file your tax returns. While contractors may deduct expenses for working from home, it will be different if you are employed. Such deductions do not apply to you if you are employed, but the only thing you can do is negotiate with your employer to see if they can cover some office-related expenses. But while they may agree to do that, know that it is just to let you save some money but defer the payment to the future.

Self Employed

You can treat your home as your office and deduct the office expenses from your tax returns when running a business, but that is only under some stringent rules. For example, you will have to show proof of regular and exclusive use of your premises for business and the utilities related to your business. That means when you are not using your residential place exclusively but only spending some time in your residence, like doing some paperwork that may not be deductible from your tax returns.

The bottom line is that you have to understand how each scenario will affect you and plan for remote working. Understand the tax rules for your state or states, especially if you work and live in different states. Also, you need to keep a good record of the workdays if you live in another state than where you work. Finally, update everything that needs updating to ensure what you are filing is correct.

2. You May Benefit from Reciprocity Agreement

Some states also may sign agreements to allow residents from one state to work in a neighboring state without the need to file non-resident tax returns. That means the states will agree that you do not have to pay the other once you pay your income tax from the one. That way, you do not have to pay double taxes. For instance, the state of New Jersey and Pennsylvania has entered into such an agreement. That means to the residents that once you file your tax returns in one state, you have to submit an exception to your employer in the other state. But it’s essential to understand the tax rules governing the two states and the agreements in place before filing your tax returns.

3. You May Pick an Aggressive State

You need to know that not all states are the same, and not all of them make agreements on how they will receive taxation from their residents. Therefore, the best thing to do is to pursue your tax revenue by visiting your state’s official website. You can also visit the tax offices beforehand so that you learn everything before you begin filing your tax returns.

4. You May Misunderstand Home Office Deductions

Before even thinking about making deductions about working remotely, it will be necessary to understand the deductions. Next, you need to know what you qualify for and don’t for home office deductions. Freelancers and other small business owners may be eligible for home office deductions, but that does not apply to everyone. Therefore, it will help you learn what working from home means before filing your tax returns. For instance, working remotely as an employee cannot qualify for insurance, repairs, utilities, or repairs deductions.

States with No Income Tax

Another thing you need to consider when filing your tax returns is the policy that governs your state. For example, some states in the United States do not charge their residents any income tax. That means that you do not have to think about filing your resident tax return if you are a resident or work in any of these states. Likewise, if you work and stay in any state and do not have a duo residence, you do not have to do anything about your income tax.

However, it would be best if you did not assume anything, as it is vital for you to be sure about your taxation before it becomes an issue. Some of these states are Texas, Tennessee, Alaska, and Florida, among others. They are a total of nine states that are income tax-free.

Where Do You File Your Taxes

Even when you know what your state requires about filing your taxes, working from home has kind of complicated things. For instance, you may not know whether you are going to adhere to the tax requirements of your home state if you are working from home or for the state of the company that you are working for if it is different from where you reside.

The general rule is that you should understand the requirements for both states to know where you stand when it comes to filing your taxes. The first thing you need to understand is who is referred to by law as a remote worker. That is because several people are working from home that may not fit the definition of a remote worker.

According to the United States Office of Personnel Management, Remote Work is long-distance telework. It is a flexible work arrangement that allows employees to spend all or most of their tie working from a different geographical location from the office. You can tell who is qualified and does not qualify as a remote worker when you know the definition. It is also important to know because that will imply where you need to file your tax returns.

Employers are usually penalized by a state if they do not withhold taxes for their employees. Therefore, the employer must have policies that disclose where their employees are working. At the same time, when you need to file your tax in different states, it will depend on whether you are working from another state and living in another because the employer requests it. If it is not because of the employer, you will have to pay taxes to the state location of the employer. Taxation is a responsibility between you and your company, and therefore you cannot assume anything.

When filing your tax returns, you need to know which state you need to submit your returns where you owe taxes. Most states will not calculate the returns based on the amount of time you spend in the states but the amount you earn.

5. You May Face Taxation Challenges If You are Working Remotely Overseas

When working overseas, you may face social security, compliance, and tax challenges both as an employee and employer. You should therefore consider the two issues separately. You may have to deal with issues like:

Dual Payroll reporting

The employer will have to think of how they will handle payroll reporting and withholding tax when they have overseas workers.

Visas and Immigration Law

Some of the things you need to know are whether an employer you have an exclusive right to work in an overseas country. Also, if you have that right, do you need a visa to work there?

Employment Law

Before you or your employer think of working abroad, it will be good to consider foreign labor laws. You will need to know the legal rights that the employee has in a foreign country and the working time required. Also, with COVID 19, it is essential to understand what travel restrictions may be in place before you plan to work in an overseas country. When it comes to permanent establishment, you will have to think of how you will be expected to handle your tax returns. Know how costly it will be for you both as an employer or an employee working overseas.

You need to know where your other work is and whether it is permanent or temporary. It is important to understand how to navigate your tax implications with across-the-border work arrangements. One of the things that may happen when you work across international borders is that you may risk establishing a taxable presence in the country your employer performs the work. Your employer may have to pay income tax based on the following:

·   What activities you are doing as an employee?

·   What profit you are making as a result of that activity?

·   What income tax treaties exist between the two countries?

·   What tax reporting obligations exist?

One of the things you have to learn about is what it means to have a taxable presence in the country where the employee is working and what triggers that. At the same time, please understand the employee activities and the level of authority you can exercise with the employee for your organization. You also would want to evaluate your company’s organizational structure to establish if an offshore employee holding company could help you evade the taxable income.

Many countries have a distinction between employees versus Contractors, and it will be essential for you to understand that distinction. That way, you will know whether you will treat the workers in that jurisdiction as employees, consultants, or contractors. In addition, you should bear in mind that having employees in a different country may mean establishing a taxable presence of those employees in that country. Also, some countries treat contractors the same as employees, which will create a tax presence in the country where they are working.

It is good to know the consequences of evading taxes. In most developed countries evading tax is treated as a crime, and it is punishable either by imprisonment or financial penalties, meaning it is a grave omission. When a company or a person fails to pay taxes by not stating the true state of affairs to the relevant tax authorities, they are said to evade taxes. The situation is also termed fraud, and fraud is a criminal offense punishable by law. But when it comes to tax avoidance, it means either a company or an individual legally exploits the tax system to bring down the tax liabilities is referred to as tax avoidance.

Understanding the law and taxation system in your country or state will also help you know when your business can be held criminally liable. For example, the state holds businesses criminally liable if an employee or an associate person facilitates tax evasion while still providing services for the same company. Therefore, the best thing to deal with taxation when working in a remote location is to understand everything. that is, taxation for both the country you are working in and the residential country of your company or employer.

The tax information is all available on the official website of each country and state, and as ignorance is no defense, the best thing is to have the correct information. All the laws differ from state to state and country to country, and they also keep changing. However, if you want to have the relevant information, keep updating yourself and decide based on facts.

Steve Todd

Steve Todd, founder of Open Sourced Workplace and is a recognized thought leader in workplace strategy and the future of work. With a passion for work from anywhere, Steve has successfully implemented transformative strategies that enhance productivity and employee satisfaction. Through Open Sourced Workplace, he fosters collaboration among HR, facilities management, technology, and real estate professionals, providing valuable insights and resources. As a speaker and contributor to various publications, Steve remains dedicated to staying at the forefront of workplace innovation, helping organizations thrive in today's dynamic work environment.

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