Content
Remote work is celebrated by workers across industries primarily because it presents workers with more freedom. However, when neglected, the tax complications of remote work present significant downsides. Workers who use 1099 and Schedule C forms, as well as sole proprietors, can still take advantage of deductions for their home office setups. Organizations near state borders often hire employees from other states who commute to work across state lines. This is common in cities such as Portland, Chicago, El Paso, Washington D.C., and New York City.
Without an EOR, most U.S. companies choose to treat international employees as independent contractors. This can cause a host of problems for workers and businesses if they are not careful. People who work as contractors must generally be free from restrictions about when they work, how they receive payments, the rates they charge, and whether they can work for multiple companies. Workers who do not meet the definition of contractor may be considered employees under local jurisdictions. For remote workers in the U.S., physical location remains the determining factor for which taxes workers pay. Employers who hire employees outside their home states must fulfill their duties to withhold state taxes on a state-by-state basis.
Deductions and Tax Implications for Home Offices
However, if the remote employee works in a different state, they likely pay state income tax to their home state rather than their employer’s state. If they live in a convenience rule state, they often need to pay taxes to their employer’s state or file for exemption via a reciprocal agreement. At the federal level, employers must withhold federal income tax, Social Security taxes, Federal Unemployment Tax (FUTA), and Medicare taxes for all W-2 employees, including remote workers. If you have a telecommuting employee in a different state than your location or employees in multiple states, you must withhold income taxes for the state they live and work in. You’ll pay unemployment taxes and report their income to the states where they live, not your state.
5For a further discussion of the erosion of nexus protection and the burden on small businesses, see Stanton, “Erosion of Nexus Protection and the Burden on Small Businesses,” 52 The Tax Adviser 182 (March 2021). The New Jersey Division of Taxation (Division) took the position that TeleBright was liable for the CBT because it was “doing business” in New Jersey by permitting the employee to work https://remotemode.net/blog/how-remote-work-taxes-are-paid/ from her home within the state. In response, TeleBright asserted that it was not “doing business” in the state and further challenged the Division’s position based on both Due Process and Commerce Clause grounds under the U.S. The best people don’t live in one place, even if that place is called Silicon Valley. Hiring full-time workers in another country creates a whole new set of challenges.
APS Launches Workforce Planning for Enhanced Staffing Insights
In return, your employer covers that amount by paying for certain benefits of similar value for you. That could partly be due to the end of the low- and middle-income tax offset as of last year. Tapping your retirement funds before you’re forced to do so could make sense, as could a Roth conversion, Sarenski says. With a conversion, money is transferred to a Roth IRA from a pretax retirement account such as an IRA or 401(k). That changed in 1983, when Congress decided to tax a portion of benefits for the highest-income recipients.
Consider getting help from a tax professional or employment attorney who is licensed in the states where you have remote employees to determine your tax responsibilities. Since the start of the Covid-19 pandemic, there has been a dramatic increase in remote and hybrid work. For regular W-2 employees, working from home may have a minimal impact on your taxes, but there are plenty of situations where it can get complicated. If you work and live in different states and municipalities or if you lived in multiple states throughout the year, you may have to file state or local taxes in each jurisdiction. Employers don’t have to make any state withholdings for Alaskan remote workers.
Defining remote workers: What do we really mean? 
Most small businesses usually outsource this to their accountant or to a payroll expert or agency. Hiring a dedicated professional can be expensive, which explains the quick growth in popularity of services such as Gusto (we use it, too!), which simplify and automate many of the processes around payroll. This works well in the cases where you don’t have any full-time workers, otherwise dealing with taxes, unemployment insurance, etc. is going to be just as messy. However, it is important to remember that payroll is not just about transferring money into the employee’s account—especially if you have full-time employees, and not just contractors.
