The Tax Headaches of Working Remotely in U.S.

The Tax Headaches of Working Remotely in U.S.

June 24, 2021

Remote working is becoming increasingly normal, and it set to only continue to grow in its popularity. With the help of remote working, an employee is no longer physically restricted when it comes to where they work. An employee who lives in New Hampshire can work for a company in New York, without ever having to leave their home state. This allows freedom to find work from employers who live in different cities, or even states. People can also find remote work from businesses situated in other countries.

While remote working opens up new opportunities when it comes to employment, there are also certain headaches associated with it. The primary issue many people face has to do with the taxes they owe at the state level. Within some states in the US, workers could discover that they’ve been taxed twice and that they owe money in another state.

How are Remote Workers Taxed in the US? 

Anyone who earns money has to pay income tax. The amount that has to be paid is dependent on the person’s income and is usually a small percentage of that income. Usually, this has to be paid to the state you’re working. However, if you are living somewhere else and working in another state – then how will you be taxed?

At the state level, tax laws within the US are very different. Some states, such as Florida and New Hampshire, have no income tax. This means that employees who live in a certain state but work at a New Hampshire-based company can only be taxed by their home state. Some other states, however, are very different.

In New York, you could be taxed twice for working remotely. This happens as you’re taxed once by the state you live in. After this, New York taxes you again as the company you’re working for is in another state. This could also be confusing when the state you’re working in doesn’t accept income tax, but the state where you live does. Take New Hampshire for example. There is no income tax for people within the state, so those who work in New Hampshire don’t have to worry about income tax.

However, those residents from New Hampshire, who work in other states, like Massachusetts, will have to pay taxes to the state they have found employment in. Since income tax is a reality in Massachusetts, residents of New Hampshire who work there have to pay tax. This applies even if the resident works remotely and has never taken a step inside the state of Massachusetts.

Some states also have cross-border taxes, especially when placed in contiguous areas. Where largely populated states are placed next to each other and there is a lot of inter-State travel among neighbors, tax agreements can develop. These are done to simplify the tax structure and system for the people who regularly travel between state borders.

How Do you Know How Much Tax you will Have to Pay in the US? 

If you want to know how much you in taxes, then you will need to carefully track, monitor and document how you work. If you live in a state where you can be taxed for income, then expect to be charged for that. In addition to this, if you’re remote working with a business in another state, then check to see what tax policies that state has.

If you find that both your home state, as well as where you work, are charging you, then don’t worry. In the US, you can be double-taxed in many states. But many states credit the amount paid in taxes back to the employees.

These are the following things you should know about being taxed in the US as a remote worker:

1. Both Employers and Employees are Affected 

It isn’t only the employee that has to deal with a complicated tax burden. An employer also has to pay certain taxes, including those for employees and payroll. When an employee is double taxed in two states, the same can also apply to their employer.

Remote working with a company in one of the nine states that don’t charge income tax can help employees steer clear of this issue. At the same time, you should also remember that there are six states that charge income tax based on the location of the business. These are New York, Arkansas, Pennsylvania, Delaware, Nebraska, and Connecticut.

2. Understand Local Labor and Employment Laws 

Aside from separate tax structures, labor laws can also change from state to state. Both employers and employees need to be aware of this, so they can ensure that they meet all their legal obligations. For employers, they may be required to have a workers compensation insurance policy, as well as unemployment insurance.

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Various states in the US make it mandatory for business owners to have these insurance policies in place. Not having these insurance policies in place can lead to legal issues later on.

3. Maintain Records 

What both employers and employees can do to understand their tax obligations, is maintain detailed records at all times. Recording data such as:

  • Amount of time spent in the home state
  • Amount of time spent in a state home to employment organization
  • Hours worked
  • Hours commuted
  • Hours worked in a state home to employment organization

Having these figures available will help you in case you need to analyze your taxes at any point.

4. Consider Tax Preparation Software 

When you’re dealing with taxes, you need to first prepare them, then file them, and then make your payment. Given how taxation for remote workers in the US can be confusing, many people choose to turn to professional tax consultants.

An alternative you can consider is tax preparation software. This helps you automatically track and keep up to date with your tax obligations, irrespective of where you work.

Conclusion 

Taxes for remote workers in the US can be confusing to understand and track. This is as different states have different requirements, leading to confusion regarding which state is owed what in taxes. If you make mistakes with filing your taxes or don’t file them on time, you can be penalized.

Keeping yourself informed and using tax preparation software can help you meet your tax obligations as a remote worker. Another way to protect your business and livelihood is with business insurance. With the right business insurance policies, you can obtain financial cover against business risks and preemptively protect your interests.

If you want to learn more about business insurance, Visit the BizInsure website.

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