Remember that all states limit how long nonresidents can work before becoming eligible for state income taxation. You’ll have to rent or buy a property, update your mailing address or obtain a new driving license to prove you’re no longer eligible to pay income taxes in another state. Employers that hire out-of-state employees who predominantly work from home must report state taxes to the states where their remote employees live and not the state where their companies are registered. Hence, if you live in the State of New Jersey, but the company you’re working for is based in California, you’ll only have to pay taxes to the state where you live. The benefits were adjusted based on rules for workers who earn both pension and Social Security benefits. Organizing tax records makes it easier to prepare a complete and accurate tax return.
If your employer operates out of another state, you typically won’t have to pay two sets of remote work taxes. Often, employee-based income taxes are based on the state where you generate income, not where the revenue itself is generated. You might be asking, “If I work remotely, where do I pay taxes?” To help you answer this question, we’ve created a guide about how remote work functions for the many types of remote workers. Typically, the rule is that employees pay taxes based on the state where they reside. However, remote work has grown in popularity so much that states are starting to become concerned about the lost revenue that comes with employees leaving high-tax states in favor of low-tax states.
Understand the state and local tax codes where you work and live
For example, standard employees in the U.S. receive a W-2, indicating their tax status. The W-2 determines the state tax withholding for remote employees (and everyone else). 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.
That said, you should check and make sure your resident state and your employer’s states have a reciprocity agreement. You are still responsible for filing correctly, though, so you should check the residency rules for your employer’s state to make sure you aren’t required to file a tax return there. What adjustments need to be made will depend chiefly on state and local tax laws governing your new residence. Attempting to summarize international tax laws in a few paragraphs would be as hopeless as counting grains of sand on a beach. For now, let’s stick to tax liabilities for remote workers who live outside the United States but work for companies based in the U.S. If you have a telecommuting employee in a different state than your office location or have employees in multiple states, you must withhold income taxes for the state they live and work in.
How taxation works for different types of remote jobs
However, remote workers who travel to other states and work from there may have to file a nonresident state tax return. Remote workers do not have to file nonresident state tax returns how do taxes work for remote jobs unless they physically travel to another state and perform work while they are there. In certain cases, a reciprocity agreement may protect workers from taxes in different states.
To change federal tax withholding, taxpayers will need to update their withholding with their employer, either online or by submitting a new Form W-4, Employee’s Withholding Allowance Certificate. For example, if you live in Rhode Island as a permanent resident, you’ll have to pay taxes on all income, but if your employer is based in Nebraska, you’ll also have to pay income taxes from that state. However, if you also have a side hustle where you make money while residing in Rhode Island, you don’t have to pay taxes on that particular income to Nebraska because you didn’t make that money there. Remote workers typically pay federal and state taxes when working within the United States, depending on their remote work arrangement and their state of residence. Depending on their situation, remote workers sometimes have to file a non-resident tax return.
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“It doesn’t know anything unless you tell it,” says Michele Cagan, a CPA. US companies that want to employ an international remote workforce cannot do so directly unless they register a legal entity in a different country or utilize the services of an Employer of Record organization. For beneficiaries like the Bernsteins who start out with lower benefits, it can be difficult to catch up, even after a record 8.7% Social Security cost-of-living adjustment went into effect this year.
Depending on where you’re logging in to work, you may have to navigate tax codes from different states or cities. And while working from home can save your employer from office expenses, the same can’t always be said for you and your tax bill. US businesses that hire international remote workers who don’t meet these criteria can potentially face penalties at home and abroad.