Tax implications of working remotely

Key Takeaways:

• Since the beginning of the COVID-19 pandemic in 2020, remote work became an increasingly popular option for employers and employees alike. It should come as no surprise that there are unique tax implications for your client to consider as a remote worker.
• Your client’s tax rates will be dependent on many factors as a remote worker, including state of residence, where their employer is located, and whether they are located primarily in the US or abroad.
• In addition to employee tax implications, remote work can potentially require more effort from employers themselves when it comes to tax withholding rules.

In recent years, we have witnessed an explosion in remote work—many people worked remotely pre-pandemic, but COVID-19 was like pouring gasoline on a campfire. People who never really imagined working remotely suddenly realized that it was a viable option in their careers. Even though many people are now returning to the office, some of your clients may never work in a traditional office environment again. Depending on your client’s individual circumstances, working remotely can have serious income tax implications to consider. Below, we will discuss how tax issues and considerations can affect your client as a remote worker. Remember, clients should always consult with a tax professional for personal advice.

Working remotely in the United States

What if your client lives and works in a different state from where their employer is located? In general, they will pay state income taxes based on their state of domicile, residence, or possibly both. The easiest way to explain domicile is the place where you actually live. You can only have one domicile. This is usually where the client holds their drivers’ license and is registered to vote.

But even if your client is domiciled in one state, they can still be considered the resident of another state for state income tax purposes. For example, many states consider you a resident if you spend more than half the year there. Let’s say your client was domiciled in one state but decided to work remotely from another state for more than six months. In this scenario, they would likely have to file an income tax return, and possibly pay income taxes in both states.¹

Another issue to watch out for is whether the company your client works for is based in a state with a convenience rule. These tax rules can apply when an employee resides outside of the state in which the business is located, not because of a business need, but rather for the “convenience” of the employee. When this happens, the state in which the business is located can tax the income of the employee and may result in double taxation. Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania impose some form of convenience rule, so it’s important to go over this with clients living or working in these states.²

Picking the best state from which to work remotely

Most people will consider more than just taxes when deciding where to live, but taxes can still be an important conversation with your client when it comes to their financial planning. When it comes to income taxes, not all states are equal. Three states—California, Hawaii, and New Jersey—impose a top marginal income tax rate over 10%.  On the other end of the spectrum, nine states (AK, FL, NV, NH, SD, TN, TX, WA, and WY) don’t impose a state income tax at all.³ Remember, however, that if your client is planning on taking advantage of a no income tax state, they will probably have to make it their domicile, taking up more permanent residency there. Even then, your client may still have to pay taxes in another state based on residency or a convenience rule—another reason why it’s important to encourage your client to consult a tax professional.

Working remotely from another country

The tax issues that face Americans living out of the country can be complex, so you should encourage your client to consult with a tax professional in the country in which they are living. According to the IRS, if your client plans to work outside of the country, they are generally required to file income tax returns, estate tax returns, and gift tax returns and pay estimated tax in the same way as they would in the United States.⁴

Generally, your client must file a return if their gross income from outside the US  is at least the amount shown for their filing status in the Filing Requirements table in Chapter 1 of Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.  Again, this might not apply to all situations— tax rules for citizens and resident aliens living abroad are complex—so consulting a tax professional is recommended.

How does employees working remotely work from employers’ perspective?

Having employees spread across multiple states can be a potential headache for employers. Because state income tax liability is based on residence, employers can run into unexpected issues with respect to required state income tax withholding. A remote work force can mean even smaller employers may end up having to navigate multiple state withholding rules. Employers may also have to comply with state employment rules and regulations. Working with an experienced payroll provider, employment consultant, and tax professional are critical for businesses with remote employees.

For more information

Speaking with clients about remote work can go beyond just tax implications—navigating remote work, especially for someone used to working in an office, can be challenging. To share tips with your client about working from home, you use our blog 11 tips on working from home: Find your balance in our new normal as a conversation starter.