Tag: Remote Worker Taxes
-
Tax Implications for Companies With Remote Workers
Continue ReadingThe remote workforce has expanded as rapidly and as surprisingly as a tube of cinnamon rolls that just popped open, secretly unnerving anyone stuck holding the exploded tube. Employers continue to find ways to accommodate employees while also forging ahead towards a new normal, and the emotions and plans behind allowing folks to remain remote or bringing people back into offices are being digested. But one thing is universal for employers, regardless of this inflection point – taxation.
Upon completion of the Constitution, Benjamin Franklin waxed poetically about the durability of the document, concluding cynically that “in this world, nothing is certain except death and taxes.” So true, ol’ Ben.
Let’s dive into what tax implications all American employers with remote workers need to know.
Tax Implications for Companies With Remote Workers
Table of Contents
- How does remote work change federal tax implications?
- Who is actually considered a remote worker?
- What is the double taxation predicament folks are murmuring about?
- The “convenience of the employer” rule
- How remote workers are avoiding double taxation
- How do employers handle nomadic remote workers?
- Where it does get hairy for employers
- Staying ahead of the game
But before we proceed, we should note that you should consult a tax professional to help you understand your specific financial situation. None of this should be considered financial advice.
How does remote work change federal tax implications?
The good news is that this part is simple – having remote workers does very little, if anything, to change your company’s federal taxes. There are no special tax credits or tax penalties imposed federally based on where an employee resides.
This does not apply to offshore workers, however, as today we are only talking about your team members working within the United States.
Who is actually considered a remote worker?
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.
What is the double taxation predicament folks are murmuring about?
If you’ve been on social media of late, you’ve probably seen people proclaiming double taxation. You’d think tea is about to be dumped into a harbor en masse as they discuss people who work across state lines from their employer.
For example, if your company is headquartered in New York and you have allowed all team members to work remotely, if one moves to Nebraska for lower cost of living, they may be subject to state income taxes in Nebraska and non-resident income taxes in New York.
It’s a serious challenge because all states have their own taxation structures. Even cities, counties, and municipalities can have their own taxation rules in addition to state and federal rules.
The “convenience of the employer” rule
That’s where the “convenience of the employer” rule comes in. It may feel like the pendulum of control has swung firmly to the side of employees, but employers certainly have an advantage in this one way.
The rule is such that an employee may be subject to the aforementioned double taxation if they have moved for their own personal preference or convenience rather than due to an employer mandating the move.
In other words, the employer doesn’t carry the income taxation burden for an employee’s residence preference.This rule is not applicable in all states however, only the following five:
- Connecticut
- Delaware
- Nebraska
- New York
- Pennsylvania
Massachusetts adopted a temporary rule during the pandemic, and states like New Hampshire had considered litigation to do the same. Arkansas observed the rule during the pandemic, but the state governor ended the practice in 2021.
Typically, an employee in this scenario can file for a tax credit if being double taxed, but that credit can be denied under this rule.
How remote workers are avoiding double taxation
Remote workers are catching on and moving to states that do not observe the convenience rule:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
For employers that intend on keeping teams working remotely, spending recruiting budgets in these specific states will grant quite a competitive advantage.
How do employers handle nomadic remote workers?
If your company is paying remote workers via W-2 and has invited them to work remotely or hired them to do so, there is a chance that some will opt into the nomadic lifestyle.
Does this make your tax filings more complicated than filings for a standard remote employee?
Not really, that part is mostly up to the employee. And like federal workers living in Virginia but working in D.C., this is nothing new.
A nomadic scenario you might be familiar with is actors. These pros live somewhat nomadically and have to pay taxes if they’re in a certain spot for a specific amount of time (which varies by location). If they’re shooting a film for several months, even if they don’t own property but rent or stay in a hotel, they may still have to pay taxes to that city or state.The IRS uses a 183-day rule to determine “permanent” residency, but that number will never apply to someone working remotely from their RV who is trying to get to every national park before 2025.
Therefore, we harken back to the “convenience rule” wherein an employee’s migratory methods are more on them than they are on an employer.
Where it does get hairy for employers
There are two scenarios that have complicated hiring for employers. First, the shifting laws surrounding disclosure of salary ranges in job listings has made some employers unwilling to advertise open roles in certain cities and states.
Regarding taxes, however, the big hiccup is that if your company has even a single employee living in some cities or states, it could prompt required registration for a sales tax permit, and the company would have to file sales tax returns according to that state’s schedule. County and city tax registrations and filings may also be required.
This kind of compliance is easy for large organizations that have entire teams dedicated to this, but can become cumbersome for smaller teams, which is why hiring out of state isn’t burden free.Companies of all sizes are still navigating these waters and choosing which states they will and won’t hire from. There is ample opportunity for employers to stand out in recruiting by making clear their hiring practices, and explaining them – especially for those willing to add some extra compliance work to their standard operating procedures.
Staying ahead of the game
Staying ahead of the taxation game is critical – ask any billionaire how they got so rich, and you’ll find a common theme emerges regarding their maximization of tax advantages.
How can you get into the groove of staying ahead? Follow tax experts like the Tax Queen on social media so that taxation issues are organically hitting your feed and keeping you up to date without your having to seek out new information.
Know that potential employees looking to remain remote are preferring states that don’t collect income taxes. This will help your recruiting efforts immensely.Most importantly, staying compliant with local, state, and federal governments may feel overwhelming, but hiring a tax expert that specializes in remote workforces is a lifesaver for your company.
-
Your Complete Guide to Tax Implications for...
Continue ReadingCountless people have joined the remote workforce during the pandemic, many with no intentions of ever going back into an office. Meanwhile, many of us have been working remotely for decades, enjoying different types of nomadic lives. Now that we’re all in the same pool, we should probably talk about remote worker tax implications. It’s not an ultra mega super fun topic, but one that we’ll work through together – deal?
But first, some caveats – this is absolutely not financial advice, and you should talk to your tax professional about your specific financial situation. If you don’t have one, we recommend hiring a good one because you’ll often end up paying less (even with their fees)! The second caveat is that a self employed individual can work remotely but is not necessarily a remote worker. For the context of this article, the phrase “remote workers” indicates someone that works for a company but works from a location other than that company’s physical office. Finally, the following is geared towards folks working in America – tax implications for working abroad, even temporarily, are much different.
Your Complete Guide to Tax Implications for Remote Workers
Table of Contents
- What’s new for taxes in 2023
- How to avoid the double taxation conundrum
- How do remote workers get taxed when permanently relocating?
- The impact of remote work on your benefits
- Don’t assume you can write off home office expenses…
- Why do some employers refuse to hire from certain states?
- How to stay ahead of remote worker tax implications
What's new for taxes in 2023
Just because we got a grip on tax implications last year, doesn’t mean we are all up to speed this year. So we asked the expert, Heather Ryan (aka the Tax Queen) what we need to know about 2023 since she’s a federally licensed tax practitioner authorized to represent taxpayers in all 50 states, and she had great news!
Ryan said, “There really haven’t been any changes for 2023 for W2 workers. Taxes for remote workers vary based on the state of residence or domicile and possibly the state of the company as well.”
”For example,” Ryan continued, “NY companies are required to withhold NY state income taxes whether or not the worker lives or physically works in NY. The remote worker will be responsible for filing and paying NY taxes as a non-resident.”
While there aren’t major changes for how remote workers get taxed in 2023 (hooray!), working across state lines can still get a little hairy – let’s walk through that next.
How to avoid the double taxation conundrum
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.
How do remote workers get taxed when permanently relocating?
Some folks leave the state where they were originally hired, and being considered a “permanent” resident varies from state to state, but if you have relocated, the implication is that you aren’t going back after a certain number of months, so you’ll need to file according to what your tax professional advises. The IRS uses the 183-day rule to calculate residency within the United States, so many states follow the same rules.
It is also important to note that just moving somewhere doesn’t always trigger a magical notification to any governmental agency – some states consider you a new resident when you register your vehicle, others when you change your driver’s license, and others when you complete your voter registration.
Further, each state has different rules for how long an employee can work in their state without owing income taxes, so in some instances, you may have to file non-resident tax returns.
If you have been working in your RV traveling across state lines, visiting Airbnbs, or just split your time between various states, it can get complicated depending on the length of each stay – just ask any actor or athlete who works all across the nation.
When multiple states are involved, or the question of permanent versus non-permanent resident comes into play, it is extremely important to seek guidance from a qualified tax advisor, especially one experienced in assisting remote workers.
The impact of remote work on your benefits
Benefits offered are not typically impacted by where someone is physically working from, but there are a few exceptions to be aware of. First, some companies consider their on-site offering part of their benefits package, for example, they have a gym in the basement, or childcare at headquarters. These tangibles are something many employers expect to just be unused by remote workers, not typically compensated for in other ways (but it doesn’t hurt to ask when negotiating a salary).
Besides missed benefits, if a company offers employee stipends, that is fully taxable, so they’ll need to report that added income to their state because it must be included on your W-2 Form. it impacts the total amount of taxable wages as well as withholdings for your individual income tax. Employers typically know this and automatically do this, but if you enjoy stipends, make sure your tax professional is aware of it so they can check that everything is reported correctly.
Don’t assume you can write off home office expenses…
Just because you work from home and you added a corner desk in your dining room, you might not necessarily qualify for a home office space deduction on your taxes because it depends on your employment status. In the past, it depended on employment status and how you actually use a space, but the latter is currently irrelevant.
That is because the 2017 Tax Cuts and Jobs Act put the home office deduction on hold through 2025 for employees who receive a W-2, regardless of working from home half of the time or all of the time. During this period, you cannot deduct work expenses to reduce the income you are taxed on.
You can request reimbursement for office expenses from your employer when you pay out of pocket, but we recommend coming to an agreement before shelling out any cash unless you’re willing to spend it regardless of reimbursement. For example, many people upgraded their office chairs during the pandemic as they worked from home, and while a reimbursement would be nice, an unbroken back is even more nice.
Why do some employers refuse to hire from certain states?
There are two major reasons why employers refuse to hire from certain states. The first has nothing to do with taxes, but is because they have to publicly disclose salary bands in job listings.
The second is that in many states, if an employer has an employee living in that state, it could trigger requirements for them to register for a sales tax permit and file sales tax returns according to that state’s schedule (as well as county and city taxes). Smaller organizations are often just not equipped to set up an entire business footprint for a single employee, so they may be unwilling to hire from states with these requirements.
How to stay ahead of remote worker tax implications
States have become more aggressive with tax collection of late, so staying informed is extremely important. Doing this helps you to make more proactive moves. If you know a specific state has a taxation scenario that feels oppressive, you might avoid it. Knowing another state has no income taxes might attract you. But you also now know that it matters where your employer is doing business as well.
Follow tax experts like the Tax Queen on social media platforms so updates are organically hitting your feed and educating you and keeping you informed about tax matters.
Lastly, we’ll reiterate that tax codes have gotten fairly complex for remote workers, especially digital nomads, so it can save you so much money by hiring a knowledgeable expert, but more importantly, it can keep you out of trouble with the local and federal governments.
