If you work remotely, you might find yourself a little confused on how things will work when tax time comes around. Do you file by the rules of the state you live in or the one you work in? If the company you work for is in a different state than the state you live in, your tax situation will unavoidably differ from someone who physically travels to another state for work. Here’s what we know.
The type of relationship you have with your employer will determine the tax liabilities that both of you will have. If you own a business with remote employees, this determined which taxes you withhold or pay, which benefits you have to provide, and so on. The different types of remote workers are as follows: Full Time, Sole Proprietorship, and Contractor.
For a full time employee, the employer withholds and pays income and payroll taxes on their behalf. For a sole proprietor employee, a different company issues an invoice and pays taxes as a corporation. For a contractor employee, they (the employee) are responsible for handling their own taxes.
We’re going to address employers for a second here – how you handle your remote worker’s taxes does not only depend on their employment type, but also their location.
If the remote employee works in the United States, you must generate a 1099 form (if they are a contractor) or a W2 form (if they are an employee) for them. Generally, workers in the United States owe two main types of taxes, income taxes and payroll taxes (given that they do not live in a no-income-tax state, in which case they will only owe payroll taxes). You will have to register with the relevant tax authorities in the state that the remote employee lives. If you want to avoid doing that, hire only contractors – they are responsible for their own taxes, minus your sending them one form (1099 or W2).
If your remote employees work outside of the United States, you must consider how exchange rates affect your remote employees. Most banks and money transfer services incur a hidden cost when the employee moves to receive their payment. Typically, you will have to open a local branch for your company and comply with all local laws regarding employment such as minimum pay, overtime, or benefits. This can also usually be avoided by hiring only contract workers, where the employee will handle their own taxes in their own country.
You can hire a payroll expert to handle your business taxes for you if this sounds complex or time consuming. It is true that there are a lot of legal gray areas when it comes to international or out of state taxes, so you want to be sure you’re doing things correctly.
The best structure for your business to hire, manage taxes, and pay remote employees depends on the unique characteristics of your business, but there are a few guidelines that any company hiring remote workers should follow: Keep things simply by paying a few dollars for a service that saves hours of your time instead of trying to do everything tax related by yourself. Make sure your remote employment arrangement is beneficial to both sides, so that your employee is not put into a situation where they have to pay thousands of dollars in fees and taxes. Also, don’t violate the law – it will come back to haunt you quicker than you think. Remember, you could be audited at any time, and knowingly violating tax laws is a crime.
Now we must address the remote employees – here are our best tips for your taxes.
More employees are working remotely than ever before. Navigating tax time can be a stressful thing for each and every one of them. Federal and state taxes can be tricky! Your situation is unique, too – it matters whether or not you are an employee or a contractor, it matters where you live and where your company is headquartered, it matters why you’re working remotely, and many more things. It may be easiest to connect yourself with a tax professional to help guide you through this time – they know what the laws are and you are less likely to have a mistake on your forms if there is an expert on the subject reading over your shoulder and checking your work.
If you are a salaried remote employee, everything should be relatively painless. Your employer is the one taking care of withholding money for your taxes, and sends in that money to the government on your behalf. They even cover 50% of what you owe on social security and Medicare taxes! If you are a self employed or independent contractor type of employee, there’s more to think about. Are you required to file quarterly or yearly? Do you have all of your 1099s? Did you make a profit? Did you save enough money to cover everything you owe, including all of the social security and Medicare taxes (if you are self employed or an independent contractor, you pay that 50% that an employer would typically cover on your behalf)? If you don’t know the answers to these questions – hire a tax professional when tax time rolls around.
You can claim a lot of things as deductions on your taxes as a remote employee, including your home office (provided it’s a designated portion of your home, you can deduct that percentage from your rent or mortgage interest that the home office takes up, in addition to the utilities that space consumes), business essential office supplies, software, and services (keep track of how much you spend on office supplies and keep the receipts! Your desk, desk chair, computer, laptop, work mobile, webcam, software, internet service, and more count here.), travel costs (driving or flying to visit clients or your employer including mileage, airfare, hotel, and parking fees), business related meals and entertainment (the IRS will only pay back 50% of these costs, but claim them anyway!), training and education (If you took any professional development classes that were not free to attend, or if you attended any industry conferences, you can deduct the costs of doing so), marketing and advertising (including the hosting service for your business website, business cards, and relevant branded and promotional materials), professional services (for example, someone to design your website and business cards, a CPA, etc), and health insurance (if you’re self employed, claiming a profit for the year, and your family was not eligible for coverage under your employer, you can deduct 100% of health insurance costs for yourself, your spouse, and your children or other dependents).
Depending on your exact situation, you might need to file two state tax returns – a resident return and a non-resident return. Your resident state is the state in which you live. Your resident state has the right to tax all of your income, regardless of which state you earned the money in. A non-resident state is a state that you have not lived in over the past year. Different states have different non-resident tax laws on who is required to pay non-resident taxes. Your tax professional can help you define these laws.
Even though certain states have different non-resident tax laws, typically if you live in one state and work in another remotely, you only have to pay taxes and file to your resident state. If you’re working remotely you will probably only have to file a resident tax return to the state you live in, but if your W2 form lists a state other than your resident state, you’ll need to file a non-resident tax return to the state listed. This is the case where you will file two returns – one in the state you live in and a non-resident return to the state listed on your W2, where your company is located.
Report all earnings on your resident tax return! You must do this unless you live in an income tax free state, such as Florida. You can’t be double taxed, either, so don’t worry – if this ends up being the case, your resident state will automatically entitle you to a credit for the taxes paid to the non-resident state. It will be a dollar for dollar reduction.
If you live in any of these states, you don’t have to file a state tax return. Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming. Remember, you have to reside in this state for this to apply. If you live in a different state and the company you work for remotely is in a no-income-tax state, it doesn’t count.
Don’t let all the tax complications that accompany working remotely scare you away from the opportunity. For most people, the good far outweighs the bad.
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