Remote Work Taxes: Everything You Need to Know
Where should employees pay remote work taxes? This guide goes through the factors that govern the taxation of remote workers in the US and abroad.
Published on September 22, 2022
Remote work taxes 🧾The trend toward all types of remote working (e.g., telecommuting), increased by the pandemic, has prompted a conversation on the notoriously complicated issue of remote work taxes. What happens to taxes when people work remotely in another state?For example, a remote worker for a California-based employer is digital nomading for six months in Florida while maintaining a legal address in Texas. In other words, they are permanently employed by a California-registered company, while temporarily “resident” in Florida, and permanently “domiciled” in Texas. Where do they pay taxes in this situation?Note: “Residence” and “domicile” are two terms that are often used interchangeably. However, they have distinct legal meanings based primarily on how long a person lives in a specific location. A residence is temporary; a domicile is permanent and is “used to determine where you vote, file lawsuits, pay taxes, claim benefits, and oblige governmental authority.” Just as important, what happens to the company that employs remote workers? Is a remote work arrangement enough to trigger nexus and all the legal obligations this entails? If so, they may have to register with the specific Secretary of State where their employee resides and may also be subject to state-specific business regulations. Finally, remote workers are sometimes engaged in a fully remote, work-from-anywhere-in-the-world capacity. Do they pay taxes, and if so, to which country? If your company is considering making remote working permanent or hiring telecommuters and/or remote workers, then you're in the right place. This ultimate guide to remote work taxes will show you the many factors you need to consider – both in the United States and abroad – that could impact your decision. Before discussing taxation, let's quickly look at a few important words we'll use throughout this post.
Defining remote workers: What do we really mean? 🧑💼Contributing to the mystique surrounding remote work is the fact that so many different terms are bandied about during discussions. These terms are sometimes – rightly or wrongly – used interchangeably. Perhaps the most crucial definitions are also the most basic. What do we mean when we use the term remote workers? Are they the same as digital nomads, teleworkers, or telecommuters?What is the difference between a remote employee and a remote contractor – or are they identical to a "remote worker?"
Remote workerSimply put, "remote worker" is an umbrella term that encompasses anyone who is allowed to “work from a remote location outside of corporate offices.” A remote worker can be classified as an employee or a contractor; each has different benefits and entitlements. The onus is on the company to ensure they don't misclassify a worker, as they could be subject to legal and financial penalties.
Remote employeeA remote employee is someone who isn't required to go to the company office to perform their job and whose work, financial and business aspects, benefit entitlements, and working relationship tenure are or can be directed and controlled by the company.
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Remote contractorUnlike remote employees, remote contractors aren't often entitled to benefits (e.g., paid leave) and are hired on a project basis (rather than indefinitely). However, they also usually have greater control over their work and can even hire other contractors or freelancers to help them.Note: Remote contractors are also sometimes called "independent contractors," "freelancers," and "contractors."
TeleworkerA teleworker is someone who performs their job "from an approved alternative worksite other than the employee's official duty location for an approved number of days each pay period." In other words, a teleworker could work from home but may also have to travel to another work site to perform their job.
TelecommuterOn the other hand, a telecommuter works from home and uses technology to connect to their workplace to perform their job without having to go to a work site. In short, telecommuting brings work to the worker rather than the usual case where a worker goes to where the work is.That said, the terms “teleworkers” and “telecommuters” are often used interchangeably.
Digital nomadAs the name suggests, digital nomads are remote workers who aren't tied to a specific location. They take advantage of the flexibility afforded by remote work and move from one place to the next (sometimes, from one country to another!). Digital nomads rely on modern technology, such as smartphones and mobile hotspots, to do their work wherever and whenever they want.Note: Definitions in this section refer to US conventions. Other countries apply their own criteria to determine if a worker is an employee, often dependent on some type of dominant impression test that goes beyond simply looking at written employment contracts.
Remote work taxes: American demographic 👷♀️🧑🏭In this section, we discuss remote work taxes that American remote employees or contractors working out of state or out of the country may incur – and how this could impact the companies that employ them.
Remote work taxes in the United States 🇺🇸The United States has complex taxation rules that require individuals and businesses to pay a variety of taxes at the federal and state level. In addition, different factors (e.g., duration, location, and reason) can impact what remote work taxes must be paid – and to which state.
Duration: Permanently or temporarilyDid you initially hire workers to be office-based but have had to direct them to work from home because of the pandemic? Are they staying in the same state as you, or are they moving elsewhere? If they're working from out of state, will they be working from there temporarily or permanently?
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Where your remote worker will be based impacts tax liability – theirs and yours – because different states have different tax rules. For example, 43 of 50 states (i.e., not Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming) require a personal income tax return to be filed if a worker performs their job within their borders beyond a specific but variable number of days. Let's say your employee is permanently domiciled (see next section) in Alaska but worked a day in New York. They won't have to submit a tax return to Alaska, but they will need to for New York.It's important to remember that your employees' decision to work remotely from a state different from where you're headquartered and/or they are domiciled (i.e., have their legal address) could impact your finances (and even reputation). Encourage them to let you know if they are considering moving out of state.
Location: Residence and domicileEach state has a statutory test determining whether someone is a temporary or permanent resident. This test often involves:
- the amount of time a person has spent in the state
- their domicile (also called permanent home)
Remote work and the evolving nexus standardOne reason why the location of a remote worker is important is that it can trigger nexus. Nexus is the connection between a business and a state, and it determines whether a business needs to pay sales and use tax, income tax, and/or franchise tax, to that state.Initially, the nexus standard was defined by physical presence, but over time, this has evolved into an economic presence standard. Now, the connection can be established based on the amount and type of business activity rather than a brick-and-mortar building physically located in a specific state. In some instances, even the act of paying remote employees or contractors can establish that connection.In addition, businesses protected by Public Law 86-272, which excludes them from income tax liability, could lose their protection if someone working remotely in another state were to trigger nexus.Finally, as businesses themselves evolve, they may want to start hiring across state lines. They would then need to register and meet multiple compliance obligations. If this is something your company is interested in because you want to free yourself from the constraints imposed by geographical boundaries and hire the best people regardless of where they live in the United States, you can work with an HR and payroll platform like Pilot, which lets you pay domestic and global team members in one platform, and also do automated state registrations.
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Reason: Necessity or convenienceSome states can tax workers based on why they’re working remotely in another state – regardless of where they live. Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania adhere to this convenience of the employer rule (or simply convenience rule), which allows them to tax a person both where they work and where their employer's office is located, with no tax credit.In the case of Zelinsky v. Tax Appeals Tribunal of New York, for example, the appellant lived in Connecticut and worked for a law school based in New York. He was essentially taxed twice because "...he stayed at home for his own convenience and was not obligated by his employer to work outside New York."
State tax agreements and exceptionsAnother important thing to note about remote work taxes in the US is that some states have tax agreements and exceptions with other states. Illinois, for example, has a reciprocal agreement with Iowa, Kentucky, Michigan, and Wisconsin; these states do not tax the compensation of Illinois residents.In addition, some events can precipitate tax exceptions. At the height of the pandemic, the following states declared that a taxpayer who temporarily relocated within their borders was not liable for state income tax:
- New Jersey
- Rhode Island
- South Carolina
Withholding individual income taxesBusinesses must stay up-to-date on changes in tax laws in response to the increasing popularity of remote work. They have to know where or if they need to withhold state and local income taxes based on the previously mentioned factors.
Remote work taxes outside the United States 🌏Remote work taxes outside of the United States is an even more complex issue, with each country implementing its own tax code, reciprocal agreements, exclusions, and exceptions. That said, remote workers are often required to file taxes in their tax residence country (i.e., the country they spend the most time in). Sometimes, they will also owe taxes to their country of citizenship at the same time, as is the case with US citizens.It's also possible that you may be entering into a working relationship with a digital nomad who works for your US company while they’re a tax resident in one country and a citizen of another. In this case, and especially where a visa is involved, they (and by extension, you) may be subject to multiple tax obligations or even enjoy tax incentives (e.g., Portugal's NHR status award).You must be aware of local employment and leave laws if you are employing or contracting the services of a tax resident abroad, as you could be subject to legal and financial penalties. For more information on US and international employment and leave laws, check out our blog posts on compliance and benefits.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
Interested in hiring an employee or contractor based outside the United States? You'll want to work with a trusted advisor specializing in international compliance to ensure you're not accidentally overlooking a critical labor law or misclassifying a worker. Pilot can help. We have a team of experienced HR and legal experts who can help you navigate any tax-related questions as you build your international team. We also provide remote payroll, benefits, and compliance for US-based companies hiring globally.
Frequently Asked Questions (FAQ) about remote work taxes ❓❓❓If you need more information about remote work taxes, this section answers the most common questions remote workers and their employers are asking.
Do remote workers/digital nomads have to pay taxes in the destination country?Yes, remote workers have to pay taxes in their destination country (i.e., the country where they’re currently located) unless they happen to be living in a country implementing tax incentives or that has a reciprocal agreement with their own country. Remote workers in Barbados, for example, can get the 12-month Barbados Welcome Stamp, which exempts them from the Barbados Income Tax. US citizens, who are subject to tax on worldwide income, would no longer have to worry about double taxation if they were remote working in Barbados.
Are remote workers/digital nomads going to be taxed twice?Double taxation depends on the following factors (among others):
- The worker’s citizenship
- Their residence status in the destination country
- Their worker classification
- If they qualify for tax incentives
Can a remote worker be taxed twice on income?Yes, if the remote employee/contractor is in the US and works for an employer based in a convenience rule state. If a worker is a US citizen working abroad, they could be taxed twice on income earned if they are a tax resident in a country that does not have a tax treaty with the US.
What can happen if remote workers/digital nomads skip remote work taxes?Remote workers and the companies that employ them may be served with a number of legal and financial penalties if they fail to pay remote work taxes, including, but not limited to:
- Fines and late fees (e.g., late filing of company tax returns and self-assessment tax returns)
- A criminal record and even jail time
- Deportation or denied entry (see, for example, one of the eligibility requirements for an Australian tourist visa)
Comply with tax laws anywhere in the world—partner with Pilot 👥As you can see, US and international taxation requires the expertise of a tax professional. To navigate these often muddy waters and make your life easier, why not work with an experienced Employer of Record (EOR) that will help you meet your tax obligations, stay compliant with local tax laws, and streamline the process for you?Find out how we can help by scheduling a free demo with one of our experts. Alternatively, watch our video demo for a quick, 7-minute walkthrough of the platform.
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