Remote Work Taxes: Understanding Your Tax Obligations

Most educational resources on taxation cater to people in traditional environments. But since the COVID-19 pandemic caused a rapid shift to remote work, many people have been asking:

If I work remotely, where do I pay taxes?

Each state has its own tax laws that determine how your remote work will affect your tax liability. For instance, some states have no income tax, while others tax both residents and non-residents. There are also states that offer credits if you are taxed twice. And finally, there are so-called convenience rules for taxing non-residents.

In this blog post, we will cover all of this and more, answering the most common questions regarding remote work and taxes.

If I Work Remotely, Where Do I Pay Taxes?

If you live in a state with no income tax, such as Alaska or New Hampshire, you won’t have to pay any taxes on your remote work. However, if the company you are working for is based in another state and doesn’t withhold taxes from your paycheck, then it’s up to you to file your return with that state.

If you live in a state that does tax income and your company is located there as well, then it’s pretty simple: the company you work for will withhold taxes from your paycheck (or they’ll ask you to make estimated payments).

If you live in a state that taxes income, but you reside in a different state that also taxes income, then you may need to file your income taxes in both states. In this case, it’s important to research the state tax agreements between the two states.

Congress passed a law in 2015 that forbids double taxation — so you may be able to get a credit on your tax return if you’re taxed in two states.

Which States Have No Income Tax?

As mentioned earlier, several states have no income tax. These are:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

What Is the Convenience of Employer Rule?

The Convenience of Employer Rule obligates employees to pay income tax to their employer’s state even when working from a remote location in another state. As a result, these individuals are often subject to double taxation. Typically, when this happens, the state where the person lives would award a tax credit to offset taxes in the state where that person works.

There are seven “convenience rule” states:

• Arkansas
• Connecticut
• Delaware
• Nebraska
• New York
• Pennsylvania
• Massachusetts

What Is a Reciprocal Tax Agreement?

A reciprocal tax agreement is an arrangement between two states that allows workers to pay income taxes only in their state of residence. This means if you reside in one of these states, but work remotely for a company located in another state that has a reciprocal tax agreement with your home state, then you won’t owe taxes to the other.

For example, if you live in Virginia and work for a company in Maryland (which has reciprocity with VA), then you won’t owe taxes to MD.

Final Words

If you are planning to shift to remote work it would be best for you to research the state’s income tax law. And even if you have been enjoying your home office for a while now, make sure you keep an eye on any changes. The rapid growth of the nation’s remote workforce spurs changes, which may affect your tax burden at some point. And if this all sounds too overwhelming, consider getting professional help with your income taxes.

FAQ

Do remote workers pay taxes to the state they reside in or the state where the company is located?

It depends on the state. Some states tax income of residents and non-residents, while others only tax income of residents.

What if I live in a state that has no income tax, but my company is located in another state that does?

You may need to file taxes in both states. In this case, you should research the state tax reciprocity agreements between the two states.

What if I live in a state that taxes income, but I work for a company located in a state with no income tax?

You will not have to pay taxes to the other state. However, you may still owe taxes to your home state.

What is double taxation?

Double taxation occurs when you are taxed in two different states on the same income.

Can I get a credit if I'm taxed in two states?

Yes, Congress passed a law in 2015 that forbids double taxation. This means you may be able to get a credit on your tax return if you’re taxed in two states.