Due to the coronavirus pandemic, many people worked remotely for at least a portion of 2020. Because of this, 2020 taxes may look a little different for some taxpayers.
I work remotely for an out-of-state employer. Do I need to file taxes in two states?
If your state and your employer’s state both have income tax, you should be prepared to file state tax returns for both states. You’ll file as a resident for the state where you live, and if taxes are withheld by the work state, you’ll file a nonresident return for the state where you work.
This can lead to being taxed by both your new state of residence and California. Where relocated employees create a VAT FE, any services rendered or supplies made through these individuals might be attributable to the VAT FE, triggering domestic VAT. Likewise, services rendered or supplies made to that VAT PE might also trigger domestic, potentially requiring the employer company to register for VAT purposes in that country. These rules can be different in non-European countries, but close attention should be paid to prevent triggering substantial fines. Where a FPOB PE exists, the transaction between the employer company and the FPOB PE would need to be characterized and an arm’s length compensation assessed. However, where the employee performs sales activities—and in some cases, marketing—the local taxing authority in some countries would want to see a certain return on sales by applying the transactional net margin method. Remote work can make a company look more attractive to current and future employees, but it’s also a gateway into an intricate maze of tax rules.
With a smaller team, or possibly no team at all, in a physical office, they can save big on leasing expensive office space. Yes, they do have to be sure to hire remote workers that they trust—which is why they’ll often run background checks or credit reports in order to screen candidates before making an offer. But, equipped with a team that they trust, many employers are finding the growing trend towards remote roles to be working in their favor. 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 example, Arizona requires a tax return after 60 days of working in the state.
Where do I pay state taxes if I live in a different state than my employer?
As a remote worker, you’re required to pay tax on all your income to the state you live in (if your state has personal income tax). This is true no matter where your employer is located.
Your teams are likely to have questions about going back into the office post-pandemic. You need the right policies and infrastructure in place today to support them to take advantage of the benefits they present. Some people find themselves in a situation where their employer is based in one state, they reside in another state, and work in a third state. For instance, perhaps you work remotely for an employer based in California while maintaining a residence in Oregon, but then you go to Idaho to care for a sick relative for a few months and continue working while you’re there. A worker may have tax obligations in any state where they reside and possibly the state where their employer’s worksite is located. The state where you permanently reside is called your “domicile,” but you can also be a resident of a state if you spend a certain amount of time there.
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If employees perform most of their work in-state, you report wages and pay regular unemployment rates to that state, regardless of where the temporary work occurs. It’s also important to note if your employee lives and works out of state, you are not required to report that employee’s wages to your state tax office. Instead, you would report wages to and pay unemployment taxes to the state in which the employee works. While these nine states are all income tax-free, most states do require residents to file a tax return. And keep in mind that even if you live in one of the above states, you’ll have to file a non-resident tax return if a state that does charge an income tax appears on your W-2 form. Some states even have agreements with neighboring jurisdictions that cut down on double taxation for non-resident workers.
- A working condition fringe benefit is any property or service provided to an employee that the employee could deduct if they paid for the property or service.
- Remote employees are individuals who work for your organization outside of a corporate office setting.
- This means you can still control when and how long your employee works for as well as the rate of pay, without any of the headaches of trying to understand international tax law.
- In certain cases, a reciprocity agreement may protect workers from taxes in different states.
On the flip side, you might find yourself living in a notoriously aggressive state. Although some states have offered some sort of “nexus relief” to avoid overtaxing businesses or individuals for the duration of the pandemic, many haven’t. Others, like Kentucky, have said they’ll consider the impact on taxpayers working from home on a case-by-case basis. Although larger companies tend to have established tax relationships with states other than their home state, this might not be the case for smaller businesses. If you moved out of state or spent a significant amount of time working elsewhere this year, be sure to talk to your employer so you can both avoid any unexpected tax penalties. Since the coronavirus pandemic began nearly three years ago, an unprecedented number of people have started working from home. No longer just for the lucky individual, working from home became a company-wide necessity in some cases, with thousands of workers permanently trading in their offices and coworking spaces for more COVID-19-compliant situations.
Province of Residence
Chart a long-term remote work plan that most effectively helps your workers thrive. Every company’s strategy is custom-built based on their industry, global footprint, talent needs, and company culture. Tax leaders must address questions around skills development and career progression in a mixed workplace environment. Depending on a state’s definition of working remotely by necessity or convenience, the coronavirus pandemic and a state’s travel restrictions may affect which category applies to a worker. Taxpayers who are unsure about their status should consult with a tax preparer. If a taxpayer temporarily relocated to one of these states due to the pandemic, they will not be liable to that state for income tax.
The COVID-19 pandemic has forced many employees out of offices and other physical worksites and into their homes. Now that the transition to remote work has been forced upon companies, many employers and employees are realizing how rewarding and efficient it can actually be. If you reside in one state and work in another state, and your employer’s worksite is in a third state, you may have to file as many as three tax returns.
Before you move to a new area and file taxes there, seek information about local laws. In many cases, employees may find it cheaper and easier to work with a tax professional than to navigate uncharted waters. Employers with international employees and contractors usually need third-party assistance from a PEO or an EOR to stay compliant. How Remote Work Taxes Are Paid If you have out-of-state remote workers on your payroll, it’s essential to understand how payroll taxes for out-of-state remote employees work. When you have an employee on your payroll that lives in another state and works from home in that state, you will withhold their income taxes for the state in which they work and live.