5 Useful Ideas for Remote Tax Payments You Must Know

Remote work is undoubtedly becoming the "new normal." Employers are exploring remote work solutions that open global employment opportunities. A Gartner survey showed that 74% of CFOs and finance leaders intend to transition 5% to remote work. This applied to previously on-site employees, so the shift to permanent remote status speaks volumes.

But with these opportunities for remote work come some complex tax issues. Remote work allows you to work from any location, globally. But, taxes are tricky, especially when employees work across different states or countries.

So, here's what you need to know to avoid unexpected tax complications.

Location is key

Your new remote location can and will affect your tax obligations. For instance, some states in the U.S. will require you to file a non-resident return, which includes state tax withholding, as soon as you set foot there. New York, for example, is known for taxing remote workers based on the location of their employer. So, if you live and work in different states, you may face double taxation.

Your state taxes depend on both your employer's location and where you’re remotely working. This can create unwanted tax burdens, especially in states aggressively seeking tax revenue. It’s essential to consult with a tax advisor to plan for these situations and ensure you’re not paying more than you should.

Understanding nexus: How states tax remote workers

In tax terms, "nexus" is the connection that determines a company's tax obligations in a particular state. For remote workers, this nexus can trigger additional taxes. This can happen if an employee’s presence in a different state establishes a business presence for their employer.

Generally, a state's nexus depends on factors like property, payroll, and sales. If you are a remote worker based in a state other than your employer's, you might face non-resident income tax filings. Plus, you might be responsible for withholding tax requirements in your work location.

But, if you live in a state with a multi-state agreement, you might benefit from reduced taxes. Look for the reciprocity agreements between certain states. Some states also offer income tax credits to residents who work elsewhere, reducing your tax burden.

International tax considerations for remote workers

For U.S. citizens moving abroad, your tax situation becomes more complicated. Even if you work and live in another country, you must still file a U.S. tax return regardless of how long you stay abroad. You’ll face the choice between claiming a credit for foreign taxes paid or excluding all foreign income from U.S. taxes.

Claiming a credit can help you avoid double taxation. The Foreign Earned Income Exclusion allows you to exclude up to $107,600 (2020 tax year) of foreign income. Choosing the right approach depends on many factors. You should consider things like your total earnings, location, and the country’s tax laws, so consulting a tax expert is crucial.

Foreign accounts and additional reporting requirements

If you decide to live abroad, be aware of additional reporting requirements. Any interest in a foreign financial account with a balance exceeding $10,000 at any point during the year must be reported. You must report it to the U.S. Treasury Department through a Foreign Bank and Financial Accounts Report (FBAR).

Depending on your asset holdings, you may also need to submit Form 8398 to the IRS. It’s vital to keep detailed records and file these reports to avoid hefty penalties.

State filing requirements for remote workers

State tax returns can be tricky for remote workers. High-tax states like New York can still make you pay income taxes even if the federal government has recognized you as a foreign resident.

States may treat you as a resident for tax purposes if you own property, maintain a bank account, or even just have a library card there. If you’re considering moving abroad, it’s a good idea to establish residency in a low or no-tax state to minimize your tax liabilities.

Tax treaties and employee misclassification

International remote workers should also be aware of tax treaties. These help prevent double taxation between countries. If your destination country has a tax treaty with the U.S., it could mean exemptions, credits, or reduced tax rates, providing a more favorable tax situation.

On the other hand, both companies and workers should be cautious about misclassification. If you're classified as a contractor instead of an employee, you might miss out on benefits and face unexpected tax bills. Companies should ensure accurate classification to avoid penalties.

Best practices for record-keeping and deductions

Maintaining detailed records of where you work and how long you stay there is essential for proving your tax residency and avoiding audits. Remote workers should track their workdays in each state to demonstrate compliance. Additionally, knowing which deductions you’re eligible for can save you money.

Here are some of the best practices for managing taxes:

1. Establishing Your Tax Residency

Detailed records of your work locations and time spent in each are crucial for establishing your tax residency. By documenting where you live and work and for how long, you can demonstrate to tax authorities that you’re following state and local tax laws. This is especially important for remote workers who often cross state lines or work in multiple jurisdictions. Tax residency and obligations can shift based on even temporary relocations.

2. Tracking Workdays for Compliance

Remote workers must consistently track their workdays in each state to ensure compliance. This means keeping logs or using digital tools to record the number of days you spend working in each location.

Such records can serve as evidence in case of a tax audit or residency dispute, which can help you avoid hefty penalties or back taxes. It’s not just about meeting state requirements. These records prove compliance with various tax laws across multiple regions.

3. Identifying Eligible Deductions

Additionally, understanding which deductions you qualify for can lead to significant savings. Many tax jurisdictions offer deductions that apply specifically to remote workers.

For example, if you maintain a home office, you may be eligible to deduct certain expenses. This covers aspects like rent, utilities, or office supplies, provided you meet the criteria. However, home office deductions vary widely between states and countries. Knowing the rules in your specific area can make a big difference.

4. Leveraging Education and Travel Credits

Certain states and countries provide credits or deductions for education and travel expenses. This can include expenses like courses that enhance your professional skills. Or, it could be costs incurred when traveling for work-related activities.

It’s essential to explore all the options available in your state or country, as these deductions can collectively reduce your taxable income and lower your overall tax burden. Understanding these rules and documenting relevant expenses can put you in a stronger position when it’s time to file your taxes.

Managing tax for remote workers

Remote work opens doors to a global workforce, but it also introduces complex tax considerations. Whether you’re moving across state lines or working from another country, understanding how tax laws apply to you is essential. As an employer, hiring an EOR might help ease these complexities.

Being aware of your location's impact on taxes, staying compliant with reporting requirements, and leveraging tax credits and exclusions can help you avoid double taxation and stay on the right side of the law. Keeping clear records and understanding both U.S. and international tax regulations are key to making the most of your remote work experience without any unwanted surprises from the tax authorities.

FAQs

How does my work location impact my taxes?

Your taxes depend on where you live and where your employer is based. Some states require non-resident filings if you work remotely from another state.

Do U.S. citizens working abroad still need to file taxes?

Yes, U.S. citizens must file taxes regardless of their location. They can choose to exclude foreign income or claim credits for foreign taxes paid to avoid double taxation.

What is tax nexus, and how does it affect remote workers?

Tax nexus refers to a connection that establishes tax obligations in a state. For remote workers, living in a different state from their employer can create additional state tax filings.