When working remotely, whether required or by choice, there are many things to consider and understand where taxes for remote workers are concerned. Things like: where you live, type of employment contract such as remote employee or independent contractor, state laws where you live and where the company is headquartered, write-offs, tax implications, eligibility, tax liability, and so on. This article provides tax advice for remote workers and digital nomads so you can save money and have peace of mind.
70% of people worked from home during Covid. Among them, 50% want the setup to turn into a permanent basis. That is, now that they’ve worked remotely, they no longer want to step foot in their employer’s office.
Remote work is the new norm. So how does this affect your personal income taxes?
In 2014, the Taxpayer Advocate Service estimated that there were about 10 million people who worked from their homes in some capacity.
Digital nomads and remote employees have been able to file their own taxes since the Tax Reform Act of 1986.
Remote work comes with tax benefits including monthly deductions.
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What are some tax deductions for remote workers?
Travel expenses
In order to be able to deduct travel expenses from your taxes, a bit of handy tax advice for remote workers is to create an itemized list of the date and mileage on gas receipts. Add up how much money you spent traveling and take that number as a deduction on your return.
Hardware and software purchases
The tax policy for deductions also covers cell phone purchases, subscriptions, advertising, memberships in associations, charitable contributions, and legal fees related to work requirements (such as tax advice and contracts).
Business meals, lodging, and entertainment
You can note entertainment expenses to be deductible when they are “directly related” to, or associated with, an employee’s job duties.
Home office space
Remote employees can also include home office space, business cell phone plans, and Internet service. The tax code allows employees to deduct expenses related to using a section of their house as a home office, which can save you up to $1800 in taxes per year. Tax deduction rules for a home office are not limited to the space you use specifically for your business, but also cover supplies used in that area.
Deductions for travel and business supplies can be used as a pretax benefit if they are deducted before your income is taxed. This applies to taxes for remote workers and not independent contractors.
Where do you pay state taxes if you work remotely?
For a remote worker in the U.S., it’s a common, but important question. Tax laws are changing quickly to adapt to the growing number of workers working remotely – meaning that the local tax laws tend to vary in different states.
Tax is currently assessed by the state where the person works, not the state where the person lives.
Generally, your income tax is based on where you’re physically located when earning the income. For example, your job’s office is in state A, but you’re living and working full time in state B. You’d pay income and all other taxes to state B.
Avoiding Double Taxation – Important tax advice for remote workers
Rules due to the pandemic have changed quickly. It can definitely be challenging figuring out where you owe taxes.
To avoid double taxation, it’s very important to clarify your remote work arrangements and understand the extent of your tax liability. Keep in mind that different laws apply, with some states requiring state income tax in their own tax code.
Others follow the convenience rule, while some require a reciprocal agreement between nonresident employees and the company in terms of handling tax notes.
Just because you’re complying with the tax law of New York doesn’t mean you should no longer check if you owe taxes if you’re working in San Francisco.
You should have your employer withhold taxes from the state in which you physically reside. Otherwise, the state in which your company is headquartered will withhold taxes.
If you work remotely and live in one of these states (Arizona, Washington D.C., Nevada, Tennessee, or New Hampshire), your employer will withhold taxes on some of your income.
For example, I live and work in Washington state but I was employed by a company headquartered in Indiana. I paid a portion of my income earned to Indiana and paid no income tax to Washington, as it is one of the states without an income tax.
States without income tax include:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas (no personal income tax, but there is a corporate tax)
- Washington
However, if you are working remotely for an employer outside of one of these states, even if you are physically living and working in one of the states listed above, you will pay a portion of your income tax to where the company is legally headquartered.
If you reside in any other state that offers income tax incentives for telecommuters, employers may report it as regular wages. This means less taxes withheld. These incentives include: Alabama Tax Exemption Program and Mississippi Tax Credit (for employees living 50+ miles outside of the area).
So unless your employer is following your residency tax requirements for remote workers or one of these states offers tax exemptions to employees who work remotely, then chances are good that the company will not be withholding taxes from all of the income you earn. Tax exemptions for remote workers often require employees to work at least 30 days out of the year from their home state.
Taxes for Remote Workers – Convenience States
The Tax Cuts and Jobs Act not only brought tax reform but also an additional option of filing your taxes as a nonresident of the state where you work.
If you live in one of these five states (Arizona, D.C., Nevada, Tennessee or New Hampshire) and work remotely for a company headquartered in one of these states, you will file your tax return with the state where the company is headquartered. Tax withholding for employees working remotely, even if you are living in another or a different state, will be sent to that state. Meaning, no state income tax is paid twice.
By working remotely, you may be entitled to tax relief, but it is up to you or your employer to file and claim such relief. This depends on where you live and the laws in place within that state. It’s important to notify your employer where you’re living so it can withhold taxes from the correct state.
If you live in a state with income tax and work remotely for a company outside of one of these states, chances are good that you will be required to pay taxes in some form like personal income tax or state tax return.
Where do I file my taxes if working outside of the US?
Taxes for digital nomads can be difficult to navigate, especially for expats working or living outside of their home country.
When you are working remotely, i.e. living outside of your tax-home country, the first thing you should do is check if it’s necessary for you to file taxes at all. This is especially true if you are earning less than the minimum income required for taxation in your host country.
If you are earning income in multiple countries, tax treaties between countries usually prevent double taxation of the same income. However, it is still possible that you will have to pay some taxes in multiple places.
Tax treaties often also contain information about specific deductions (such as for housing). These are limited to the tax rate of your tax-home country or host country where you work.
Wherever you earn your income, the process to file taxes stays very similar. Tax rates vary by country and place of residence, but if you are earning money in any country other than the US, the general consensus is that remote employees pay taxes where they spend most of their time working.
How to Handle Tax Returns as a Digital Nomad
Remote work has many perks. The biggest one is that you can pretty much live and work from anywhere in the world online — and there are no limits on where you can work. While this may be ideal for some, tax season can be a nightmare for others.
Taxes for Digital Nomads
When it comes to filing your taxes as a digital nomad, these are the three critical things you need to know:
1) You will have to file as “self-employed.” This does not mean you have to actually run a business. In order to claim remote work as your profession, you must be earning an income working at least part-time from home.
2) You are not able to claim housing deductions if you are staying with friends or family during tax season. The Tax Cuts and Jobs Act has said that people who live in the homes of others for free do not qualify for deductions while working remotely. Tax deductions are also not available to those who use co-working spaces or rent out a home on platforms such as Airbnb and VRBO.
3) Tax deductions for housing and transportation still apply even if you’re living in another country. Taxpayers can only claim deductions when living outside their home country for 330 full days during a 12-month period. If you work 183 days (half the year) in another country, you are subject to taxation laws and must file tax returns in both countries.
Where can I get help and tax advice for remote workers and digital nomads?
Tax Software
While software cannot inherently give advice with respect to taxes for remote workers, it can help save money and speed up your tax filing. Using one could do wonders for your own convenience.
KeeperTax – finding tax write-offs
Use a service like KeeperTax – for independent contractors, entrepreneurs, and remote workers to find hidden tax write-offs that can save you money. They’ve saved their members over $40 million and their average member sees an extra $6k annually in savings.
Quickbooks – accounting software
One of the best accounting software used today with millions of customers worldwide. Quickbooks allows you to upload your previous year’s tax return information. This makes filing taxes easy for the next calendar year. Tax advice articles are available on their website. There’s also an accountant directory to help you look up accountants near you that specialize in tax preparation.
TurboTax – easy-to-use tax filing software
TurboTax is best for people who are not accountants or tax lawyers using sophisticated strategies. Turbo Tax offers tax advice articles that help guide you through common questions on your tax return submission. Tax filing with TurboTax is easy and a great way to get started with filing taxes. For more advanced or complicated taxes may want to look into either H&R Block software or TaxAct.
See Best Tax Software for Remote Workers
Seeking out Tax Professionals
Tax professionals in the US who specialize in remote work are gradually becoming more common. Hiring a tax professional could be a lifesaver for any remote worker. A tax professional can ensure that you’re up to date on the tax code requirements, avoid tax consequences, and even help you find ways to cover lost revenue.
A good tax attorney is just as important when trying to find a trustworthy accountant to handle your tax returns. Tax attorneys will be highly familiar with the unique tax laws of every tax department, Supreme Court decisions or even just temporary rules that could alter the tax foundation, and income exclusion benefits on a federal level or abroad.
Tax professionals will also be able to keep your taxes organized throughout the following year. Staying up-to-date makes sure everything goes smoothly with your taxes when April comes around. They are also capable of making sure you are getting all the benefits that are available to you as a remote worker.
Taxes for Remote Workers and Digital Nomads – Conclusion
Working remotely in the US or even outside the US as a digital nomad certainly has its benefits. Freedom to travel, less of a commute, and more time with family, to name a few.
As the laws change to keep up with the rise in remote work, in large part due to the pandemic, there are tax advantages – and disadvantages to be aware of.
As the laws are constantly in flux, seek out a tax professional in your local area who knows the tax rules and how to file state income taxes for remote workers. For tax filing, you can use tax software for remote workers or hire an accountant. Tax advice for remote workers is key in ensuring you are aware of the tax laws surrounding remote work.
