With COVID-19 landing millions of people at home, employees are wondering about taxes. Many workers are choosing out-of-state or offshore gigs. Should this affect the way they file taxes?
This quick guide addresses the most common tax filing issues you may face when working remotely. It’s worth noting that there isn’t anything complicated about taxes and remote work. You simply need to know several nuances.
Working in the Same State
If you work in the same state you used to work in on-site, you don’t need to change anything about filing taxes.
Simply follow your normal tax filing routine. You don’t need to submit any new information or do additional research to make the IRS happy.
Working out of State
If you work out of state, federal income taxes aren’t affected. However, for state taxes, you need to do more research about tax structuring. They depend on the location of your new employer, which may come with additional tax burdens.
Tax Nexus
When you work and live in different states, you could be facing a “tax nexus.” In legal language, “nexus” means that a business has a tax presence in a certain state. It’s a connection between the tax authority and the taxpayer/collector.
The presence may be defined differently for different taxes. Usually, it means that a business is physically present in the state in any form, such as property ownership or worker employment. If a company has a nexus in a particular state, it must pay taxes on the income generated there.
The nexus definition can vary by state. For example, if Code Developers Inc. has an office, storage space, or employees in Massachusetts. Then the company has a nexus in that state.
How Does it Work?
Some states specifically indicate that having a remote employee whose home isn’t a place of business means that an out-of-state employer has an income tax nexus in the state where the employee resides.
Simply said, an employee’s home office could be considered an office location, which means the employer would need to pay taxes in the state where the employee lives.
Some states are implementing COVID-related nexus waivers for some time while others do business as usual.
Temporary Relocation
During the COVID-19 pandemic, you may avoid double taxation if you live in the following states:
- Alabama
- Georgia
- Illinois
- Indiana
- Massachusetts
- Maryland
- Minnesota
- Mississippi
- Nebraska
- New Jersey
- Pennsylvania
- Rhode Island
- South Carolina.
These states currently don’t plan to withhold state income tax from remote workers who decided to relocate temporarily for the duration of the pandemic. According to Allshore, remote staffing experts, it’s important to continue monitoring these temporary relief situations as the pandemic starts to subside.
Multi-State and Multi-Country Reciprocal Agreements
Some states have agreements to minimize multi-tax payments for remote employers. These reciprocal tax agreements allow people who live in one state and work in another to avoid double taxation. These agreements change all the time, so it’s imperative to check the fresh information about your state.
Meanwhile, the USA has similar agreements with many countries. They allow residents and citizens of the United States who work for companies located in other countries to take advantage of reduced tax rates. The same works for residents and citizens of the countries the USA signed tax treaties with.
Filing Taxes
If you work in one state and live in another, you will be filing your personal income taxes to your state of residence. When filing a resident tax return, you should report all of your income as usual.
For example, if you live in Massachusetts while your employer is located in New Jersey, you need to file your state tax return with Massachusetts’ Department of Revenue.
The Takeaway
If you work remotely, and your employer is located in another state, you need to do some research in order to file taxes properly. In some cases, you may be facing additional expenses. Talk to your employer about the taxation scheme and possible exemptions.
In the majority of cases, you don’t have to pay double taxes, especially during the COVID pandemic. However, to ensure a proper tax-paying procedure, it’s important to stay up to date with the law.
