Still working remotely? Your 2021 taxes may be more complicated

With this model, remote workers are responsible for their own taxes and there is no payroll. Instead, workers send a monthly invoice, based on the contract or agreement. Some remote workers prefer the tax benefits, others want more job security and employee rights. Also consider that in some countries it’s illegal to work as a contractor and only contract for one company, so the remote worker would be required to also do additional work for other clients. The tax issues related to remote work have an effect on passthrough entities (e.g., partnerships and S corporations), not just C corporations. In addition, most owners of passthrough entities are taxed on their distributive share of income in their resident state and the state-sourced income in the nonresident states in which the passthrough entity conducts business.

For example, suppose your organization is based in New York, but you have an employee working from home in Utah. In this case, you usually pay unemployment tax to the employee’s state of residence. One should also note that states without income tax often make up for it with higher sales, property, and other taxes.

Independent Remote Working Contractors, Freelancers and Gig Workers

Taxes can be confusing and working remotely has the potential to add one more complication to the mix. So if you’re not quite sure how to handle your taxes this year, you may be able to save money and have greater peace of mind if you work with a tax professional. Having a remote and distributed team can lead to the complicated issue of remote work taxes. You could be responsible for additional employer withholding and sales tax responsibilities if you have workers in another state who don’t work in a company office. However, this differs based on the states where your employees live and where your organization is located.

Klein, who advises several remote retailers, discussed how businesses can navigate these issues. However, Klein stresses that the employee perks of remote working may not always be in workers’ financial interest. “The amount of net worth that has moved out of the big cities has been staggering; COVID-19 has opened people’s eyes,” Klein said. “Even in high-level corporate professions, lawyers and bankers are now just as effective working remotely as they were in an office. Since states’ pandemic guidance on temporary telecommuting has long expired, CPAs’ advice will be highly sought after as companies remodel their tax strategies accordingly.

Remote Payroll Solutions Account for Time Zone Differences

The evolution and expansion of remote working provides tax professionals with an opportunity to put these skills to work and drive value for their businesses and clients. While Telebright involved New Jersey law, the issue raised is not unique to New Jersey. In fact, the majority of states take the position that a telecommuting employee creates sufficient nexus to subject an employer to the state’s business taxes. Although the issues themselves are not new, the impact of those issues is now much greater since more individuals are working remotely than ever before. Thus, Telebright is an important reminder of the position taxing authorities can take, as this column next delves deeper into the issues raised by a growing remote workforce. Moreover, TeleBright was already withholding and paying New Jersey state income tax on the employee’s salary — thus, the additional effort of calculating and paying the CBT should not constitute an undue burden.

• Businesses do not need to research or comply with local tax regulations where the employee lives.
• If you offer taxable employee benefits such as employee stipends, you’ll also need to report the additional taxable income to the states that require it.
• However, they have a state unemployment insurance tax, meaning employers don’t have to withhold state income tax.
• For instance, perhaps you work remotely for an employer based in California while maintaining a residence in Oregon, but then you go to Idaho to care for a sick relative for a few months and continue working while you’re there.

While many states offered a pandemic-related reprieve that generally resulted in no tax filing obligation for remote workers who worked temporarily in their state, the leniency was for 2020 returns. And as the nation emerges from the pandemic, that compliance break will be going away. 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, how do taxes work for remote jobs 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. For your employer state, you’ll file a nonresident or part-year resident return (whichever best fits your situation according to the state’s rules). The 2017 Tax Cuts and Jobs Act suspended the home office deduction through 2025 for employees who “receive a paycheck or a W-2 exclusively from an employer,” according to the IRS.

Tax Tools

However, an argument arose as to whether New Hampshire had standing to bring the suit. Since New Hampshire does not have an individual income tax, the assertion was that there was no direct harm to New Hampshire by virtue of Massachusetts’ policy. Whether due to a disinterest in addressing the issue or questions over standing, the U.S. Taxpayers that move to a new state should plan carefully, making certain to establish residency or “domicile” in their new home state, and making sure that they have severed all tax ties to their original state. In the year of the move, they will generally have part-year tax return filing obligations to each of the states they lived in.

States vary significantly in thresholds requiring taxation of nonresidents. In the motion, New Hampshire sought an injunction against Massachusetts’s new regulation requiring workers who previously worked in Massachusetts to pay its income tax despite working in other states due to the COVID-19 pandemic. Try a $25 flat rate for a change; 1040.com’s one price includes everything you need to file, including multiple state tax returns. If you’re unsure how your state or local tax codes affect you, then it’s a good idea to work with a local tax professional to avoid overpaying or underpaying your taxes. To avoid paying taxes on the same income twice, the taxpayer can credit the taxes paid in their non-resident state against their home state’s tax liability (or vice versa depending on which state has higher taxes). Business owners and freelancers (including contractors) receiving a 1099 form for the income they earn may be able to deduct expenses related to having a home office.

Meanwhile, there also are a handful of states — Connecticut, Delaware, Nebraska, New York and Pennsylvania — that impose a “convenience of employer” test for remote workers. If your company is located in one of those states, you generally will pay taxes there unless your remote location is due to your employer needing you to relocate. Currently, W-2 employees can’t deduct home office expenses, but independent contractors or anyone who is self-employed can deduct the costs of having a dedicated workspace at home.