It has long been typical for workers to live and work in different states, for example, people working in D.C. rarely live in the district, rather in Virginia or Maryland as it is much more reasonably priced, and commuting is normal. In other words, our government is used to handling workers that live in a state different from their employer. 

That said, who is actually considered a remote worker?

If your company is paying employees on a W-2 basis while they work in a state other than where you are licensed to do business, that is a remote worker, according to the IRS.

If your company is paying folks on a 1099 basis, they are not considered a remote worker, they are classified as an independent contractor or freelancer.

Whether you’re a large firm or a tiny operation, knowing the differences between W-2 and 1099 team members is crucial.

The reason remote work taxation is complicated is that every state has different laws, so working between state lines may muddy the waters. If you live in the same state as where the company is headquartered, there should be no change in income taxes.

If you move to another state, there are potential tax liabilities in both your home state, and the state where the employer is located. It’s called the “convenience of the employer” rule, and states that impose this rule are Pennsylvania, New York, Nebraska, Delaware, and Connecticut.

What normally happens is you receive a tax credit when you file to eliminate the possible double taxation, but it is possible to be denied your home state credit under the “convenience of the employer” rule. For example, if you live in California and work remotely for a company in Delaware, you would be subject to the state income tax in California, and a non-resident income tax in Delaware as it follows the convenience rule.

To avoid the convenience rule, consider living in and working for companies in one of these states:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

No matter where you reside, you may still have tax liabilities for city or county taxes for where your employer is headquartered AND where you live, and tax credits don’t apply in this scenario.

But the good news is that there is minimal impact on your federal income taxes, if any, when working remotely. Your employer still withholds taxes from your paychecks, just as it has always been done.