How Do Taxes Work if You Work Remotely: A Guide to Navigating Your Taxes

These new regulations allowed states to continue to tax non-resident workers even if they went remote and stayed home. Massachusetts has altered its tax scheme specifically in response to the pandemic. Massachusetts workers performing services outside Massachusetts due solely to the state of emergency are treated as though they remained in Massachusetts for tax purposes.

• But Republican House leaders are confident that there’s bipartisan support for this.
• It could also be a reason for more people to pull up stakes now that they’re less tethered to the office.
• When these employees were forced to stay home because of COVID-related shutdowns, Massachusetts created a new regulation (the “COVID sourcing regulation”) that suddenly taxed New Hampshire residents when they stopped commuting.
• Also, if you are an independent contractor for your company — you do not receive a W-2, but rather, say, a Form 1099-NEC — you are considered self-employed and taxed as such.
• Service snafus will vary by agency, depending on their respective contingency plans.

One of the most important things in properly filing taxes as a remote worker is enlisting the help of a qualified tax professional to assist in filing. Given the ever-changing tax landscape, this may not be the year to rely on free tax software. With so many workers going remote and staying that way, their approach to doing their taxes may be changing. Cannon Advisors’ Bryan Cannon shares some tips to assist remote workers in navigating their 2021 taxes. If you require an employee to live in a different state for the purposes of their work (at the convenience of the employer), you must withhold taxes for that state.

How do taxes work when working remotely out of state?

When you know what they are required to pay, you will better understand what you are required to pay. Payroll tax includes Social Security, Medicaid/Medicare, and federal and state unemployment taxes. Another Senate bill (with a related one in the House) would limit the ability of states to impose the how do taxes work for remote jobs “convenience of employer” rule on nonresidents. All of these measures have been idling in Congress since early 2021, however. For instance, if you live in Maryland but work in the District of Columbia, you only need to worry about having taxes withheld for Maryland and filing a tax return there.

Contractors hired by the federal government would also be at risk of not getting paid for services — and those businesses may start laying off or furloughing workers, Zandi said. “In other words, someone with a New York-based job who lives and telecommutes from another state still owes full income tax to New York on that compensation,” Saunders reported. “If the other state taxes that income as well and doesn’t give a credit for the New York tax, the worker will likely be double taxed.” Usually, if employees live in one state but have been working in another, they’ll receive a credit on their resident return to offset the nonresident state tax liability. “COVID-19 opened the possibility for employees to work from anywhere,” said Nishant Mittal, senior vice president and general manager at Topia, which makes software for managing remote workers. “This introduces new concerns when it comes to legal and tax compliance.”

Remote worker taxes outside the United States

“And the employees who leave first are the best talent — they have the most options.” “The mandates didn’t stick,” says Caitlin Duffy, research director of employee experience at Gartner. With the exception of a few highly publicized announcements and strict enforcement from companies, she says, we haven’t seen a flurry of new businesses announcing new return requirements, or companies actually enforcing those guidelines. HR technology can help employers track their employees’ location “to ensure they are following the proper tax regulations and to better understand where their employees are and where they have been working,” he noted. If your resident and work states have such an agreement, you only need to file taxes in your resident state. Similar to withholding thresholds, the MTC and COST model bills address withholding thresholds as well.

“Convenience of the employer” rules are requirements that taxpayers who live and work in another state must nevertheless pay income taxes to their employer’s state, even if they may never physically set foot in it. The term comes from New York, which imposes such a rule on employees of in-state companies unless the taxpayer proves to New York officials that working remotely is a necessity, not merely a “convenience.” Taxpayers rarely win. Filing thresholds represent how long a taxpayer must work in a state before the taxpayer must file an income tax return in that state.

Learn about local tax laws

“Convenience of the employer” rules are unique in that they affect remote workers through actively harmful policies, not just through inaction. Consequently, they are the only metric in this ranking that earns a state negative points. The best-performing state in this category is Minnesota, which earns a 4.

For withholding purposes, employers should be cautious when determining whether to stop withholding for remote or hybrid employees in convenience-of-the-employer jurisdictions. In jurisdictions in which an employer is required to withhold, failure to properly withhold taxes can become a liability for the employer, plus potential interest and penalties. During the pandemic, application of the convenience-of-the-employer rule has been inconsistent. For instance, Philadelphia took the position that if employees living outside the city were required to work from home by the employer because of the pandemic, those individuals were not subject to the city’s wage tax.

But if the employee works in a different state for their own reasons, you can withhold taxes for both states—the state where the business is located and the state where the employee chooses to live. If an employee lives in Summerville, Georgia, but works in Mentone  Alabama, you would only withhold Alabama state taxes because this is where the employee works. Your employee would then file state income tax in Georgia, and claim a credit for the taxes you withheld for Alabama. During the pandemic, many Americans moved out of cramped, crowded cities to areas with more space or to be closer to their “bubble” of family and friends, even if it was to a different state. States in turn offered temporary waivers, so most employees didn’t have to pay income tax both in the actual state where they were working and the state where the work was being done pre-pandemic. Statutory tax credits and negotiated incentives are often tied to the creation or retention of jobs within a designated geographic area (state, locality, enterprise zone, etc.).