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Because of this, 2020 taxes may look a little different for some taxpayers. Some countries’ laws automatically ensure intellectual property rights for the employer. The safest option is to add additional contracts to the employment agreement, ensuring employer rights to intellectual property created with or using the resources of your company. But the freedom that comes with remote work can also cause confusion when it comes to your taxes. Depending on where you’re logging in to work, you may have to navigate tax codes from different states or cities. And while working from home can save your employer from office expenses, the same can’t always be said for you and your tax bill.
While the Supreme Court rules against double taxation, the fine print reveals that it is allowed under certain conditions — for remote workers, under the convenience of the employer rule. Because there is no special agreement between these states, John will pay PA income taxes (3.07%) on 70K, or $2,149. Colorado will levy 4.4% on his total income ($5,280), though John can subtract the amount he paid in PA from that total. This means that the states in the agreement have how do taxes work for remote jobs made paying taxes to each state easier on the worker. Agreements are more common between commuter states, such as Illinois and Indiana or Virginia and Washington, D.C. Reciprocity agreements may include tax credits or even exempt a worker from having to file a non-resident tax return at all. Most states require a personal income tax return after a worker spends a certain amount of time working in the state, regardless of where the worker is permanently domiciled.
For Workers With a W-2
Certain states have reciprocal tax agreements (more on these below), and others (Arizona, California, Indiana, Oregon, and Virginia) allow reverse credits, which you apply in the work state return from the home state. Since the start of the COVID-19 pandemic, remote work has become a mainstay of the modern workplace. For many workers, the ability to work from somewhere other than the office offers a new level of freedom and convenience.
Restrict/maintain immigration – While some developing economy countries have introduced digital nomad visas, a number of which allow employees to benefit from not being taxed. Those which do not may have robust immigration requirements for employees to work there. Facilitating mobility from a tax perspective would run counter to the physical ability of employees to work compliantly in the country. Regulators and policy makers will also need to consider what future remote working arrangements may bring. Some state governments—17 so far—cooperate with each other, setting up reciprocity agreements in which workers only pay taxes in the state where they live. But those agreements are subject to renewal and might not always survive an economic downturn when states need more tax revenue.
What can happen if digital nomads skip remote work taxes?
Even if you prefer using software and preparing your taxes yourself, CPA and Tax Strategist Chika Obih recommends hiring a tax professional for at least the first year you work in a state different from where you live. The same holds true if you live in different states throughout the year. That way you’ll at least have a basic understanding of your tax situation that you can follow in the future.
- You become a state resident for tax purposes when you live in that state for a certain amount of time — in most cases, half a year (183 days).
- Four months isn’t long if you need to make preparations to ensure all your staff are compliant.
- A remote employee might work from home in the same city or region where the company office is located, or they may live and work in a different region or country entirely.
- Social security accounts for over a quarter of tax revenues in OECD countries6, however the majority of current tax treaties are specifically concerned with income taxes in cross-border arrangements.
- But even pre-COVID-19, the challenge was the inconsistency in the rules because only a handful of states had these rules and the states right immediately around New York, like New Jersey, Connecticut, and Vermont, didn’t have these rules.
Independent contractors are those paid outside of regular staff requirements. However, these employees need to handle taxes themselves, meaning they will need to make payments to the areas where they operate. But, depending on the tax amount, they might have to pay penalty interest fines or late fees (and it tends to be quite high, so it’s better to avoid that). In Europe, the member states have created treaties to avoid double taxation. The same goes for the USA, which has income established the same tax treaties with several foreign countries.
II. Current Landscape of Remote Work in the United States
If your remote workers are independent contractors, then you are not responsible for withholding payroll taxes from their earnings, they would instead be responsible for managing their own taxes. Let’s say Sarah works for a company in the Bay Area but lives in New York. Because she triggered Arizona’s tax residency by staying for more than 60 days, she has to file state income taxes in both NY and AZ — in her case, California doesn’t require her to file as a non-resident remote worker. In this case, the individual never receives any benefit from the state’s expenditures on public services.
In some states, you may also be required to reimburse your employees for their remote work costs, such as the necessary tools to do their jobs. Taxes make up just one part of the enormously complex equation of working and hiring internationally. Workers must tackle issues like visas, culture shock, and language barriers.
