Whether you’re paying international contractors or building a remote team with EOR, our platform ensures fast, secure, and scalable payroll in 150+ countries. Employers who want to expand globally must pay attention to local tax laws and payroll compliance. This makes sense because you are using that state’s services and infrastructure. Depending on where the employee lives and works, they may be subject to tax liabilities in multiple states. PeopleKeep offers health benefits administration software, not tax services.
How Do Taxes Work if You Work Remotely: A Guide to Navigating Your Taxes
Under these rules, not only are the employee’s wages subject to income tax but potentially any other types of income (e.g., investment income) could be taxable. The employee’s state of residence can tax 100% of the employee’s income, though states may have different residency rules, while the employer’s state can generally only tax income the employee earns in that state. Income is typically earned in the employer’s state when an employee is physically present and working there. Employers should clearly document each employee’s work arrangement and location in employment contracts.
As an additional precaution, practitioners should also inquire about their remotely working clients’ travel during the year. If an employee traveled to another state(s) that imposes an income tax and worked there during the year, additional filing and payment obligations may exist in that state(s). When the employee’s state and employer’s state both have an income tax, the issues are more complex.
Location: residence and domicile
That means remote W-2 workers can’t write off expenses like internet, office furniture, rent, or travel, even if required for their jobs. Take advantage of tax software tailored to digital nomads and the self-employed. You may want to consider working with an accountant as well who specializes in remote workers and knows the nuances of your unique tax situation.
- A sole proprietor’s business income and losses are reported on their personal tax return.
- You may need to file in both your resident state and work states, but tax credits and agreements help avoid double taxation.
- Remember, proactive tax planning is key to ensuring compliance and maximizing your financial well-being in the world of remote work.
- Employers can reimburse expenses tax‑free under an accountable plan to preserve employee tax neutrality.
How to calculate the home office deduction?
Remote workers in this category must navigate both U.S. tax laws and the tax regulations of the countries where they reside or work. If you work for a company based in New York but reside in Pennsylvania, you may be required to pay non-resident taxes to New York while also paying resident state taxes to Pennsylvania. In such cases, Pennsylvania may offer a credit for the taxes paid to New York, offsetting the potential for double taxation. For remote workers, understanding the distinction between federal and state tax obligations helps navigate the different rules for tax residency and income reporting.
- You typically owe taxes in both your state of residence and the state where you physically work.
- However, with this newfound freedom comes the need to understand the intricacies of income tax and how it applies to remote employees.
- That means not everyone can write off their internet bill or home office setup.
Self-employed individuals
U.S. citizens, regardless of where they live or work, are generally required to pay U.S. federal income taxes on their worldwide income, including earnings from remote work conducted outside the United States. The Internal Revenue Code mandates that U.S. citizens report and pay taxes on all income, no matter where it is earned. For remote workers employed internationally—whether U.S. citizens working abroad or foreign nationals working for U.S.-based companies—the tax landscape is often more complex than it is for domestic workers.
That presence often requires unemployment and wage reporting accounts, business registration, and filing obligations. It explains why where an employee performs duties drives payroll withholding, nexus, and filing obligations. An employee may need to travel to a different state for a business trip or to work on a project for a few weeks. Depending on the length of the trip, the employee may be required to pay taxes in the state where they’re working and the state where their employer is based. While taxes for remote workers are usually not more complicated than those for traditional office workers, most educational resources on taxation cater to people in traditional environments.
If employees work remotely in your same state, these rules also apply, usually with only a few changes to local tax withholding. On January 18, 2022, Microsoft announced the acquisition of American video game developer and holding company Activision Blizzard in an all-cash deal worth $68.7 billion. Activision Blizzard is best known for producing franchises, including but not limited to Warcraft, Diablo, Call of Duty, StarCraft, Candy Crush Saga, Crash Bandicoot, Spyro the Dragon, Skylanders, and Overwatch. In January 2019, Microsoft announced that support for Windows 10 Mobile would end on December 10, 2019, and that Windows 10 Mobile users should migrate to iOS or Android phones. In February 2019, hundreds of Microsoft employees protested the company’s $480 million contract to develop VR headsets for the United States Army, calling it war profiteering.
During the previous summer of 2015 the company wrote down $7.6 billion (~$9.8 billion in 2024) related to its mobile-phone business and fired 7,800 employees from those operations. On September 15, 2014, Microsoft acquired the video game development company Mojang, best known for its wildly popular flagship game Minecraft, for $2.5 billion (~$3.25 billion in 2024). Cytation in January 1986 became Microsoft’s first acquisition, forming the company’s CD-ROM division. On February 16, 1986, Microsoft relocated their headquarters to a corporate office campus in Redmond, Washington. Around one month later, on March 13, the company went public with an initial public offering (IPO), raising US$61 million at US$21.00 per share at its opening on the fully electronic Nasdaq stock exchange. In 1987, Microsoft eventually released their first version of OS/2 to OEMs.
Working remotely gives employees the opportunity to work hundreds of miles from where they live — not to mention from the comfort of their own homes. A full day means the 24-hour period starting at midnight and does not include time flying over international waters. When an employee or independent contractor, who is a US citizen, works remotely in another country, the tax issues become complex because each country has its own tax code. Under the 183-day rule used by most countries, an employee is generally considered a tax resident if they physically reside in a country for at least 183 days during the year. Extended stays in another state may cause unexpected issues because many states have rules that establish residency when an employee is in a state for more than half the year.
How do taxes work for remote workers?
Implement written location and travel policies, maintain precise day‑by‑state records, use accountable plans for reimbursements, monitor employee moves, and obtain residency certificates where applicable. Engage payroll providers or tax advisors for multi‑state withholding and corporate apportionment planning. U.S. citizens and residents may use the Foreign Earned Income Exclusion or Foreign Tax Credit when working abroad. Employers must evaluate permanent establishment risk and payroll obligations in the foreign jurisdiction. Self‑employed individuals use Schedule C and, if applicable, Form 8829 to claim a home office deduction. Requirements include exclusive and regular use of a space for business, proper allocation of expenses, and documentation.
The exclusion suits taxpayers who qualify under the bona fide residence or physical presence tests and whose foreign taxes are lower than U.S. tax on excluded income. The credit is better when foreign tax rates are high or when claiming credits for specific taxes. W‑2 employees do not qualify for a federal home office deduction through the Tax Cuts and Jobs Act for tax years through 2025. Employers can reimburse expenses tax‑free under an accountable plan to preserve employee tax neutrality.
The 2025 IRS Retirement Loophole: Smart, Legal Strategies to Reduce Taxes on Your IRA or 401(k)
You could be responsible for additional employer withholding and sales tax responsibilities if you have workers in another how does remote work get taxed state who don’t work in a company office. However, this differs based on the states where your employees live and where your organization is located. You may also have some individuals who work for you as independent contractors, which is to say, on a 1099 basis. By staying informed and fulfilling their state and local income tax obligations, remote employees can navigate the complexities of multi-state taxation and manage their tax liabilities effectively.