According to Forbes, 32.6 million Americans will work remotely by 2025 and 57% of workers would go for a new job if their current company stopped offering remote work. While the remote work culture has its perks like flexibility and better work-life balance, it comes with critical tax considerations. 

Not understanding the tax filing and deductions properly can lead to situations where you end up paying double taxes or taxes for two states, or the employee is residing in a state where the employer had not previously done business. Hence, understanding your tax obligations is crucial whether you’re a freelancer or employed as a remote worker in the US. 

Before we begin, it is important to note that this guide primarily focuses on remote work within the US and doesn’t cover filing taxes while working remotely from outside the country.

Understanding Your Tax Obligations as a US Remote Worker

Being a remote worker offers flexibility, but it also adds a layer of complexity to your tax situation. It can create tax implications at the local and state level, both for the employee and employer. These implications vary based on the physical location of the employee while performing the work.

As remote work arrangements can easily result in employees having to file returns in multiple states, we offer a quick overview of how tax obligations work for a US remote worker.

Determine if You are Considered an Employee or Contractor

Two facts that you must know – you must determine whether you are working as an employee or contractor. The NCSL recognizes three categories of work – full-time remote, full-time in-office, and hybrid remote. 

Now, if you are working as an employee, your employer withholds federal income taxes and Social Security/Medicare taxes from your salary. So, at the end of the year, you will get a W-2 form to report your income for tax filing.

On the other hand, if you are hired as an independent contractor, you are solely responsible for paying self-employment taxes (encompassing both the employer and employee portions of Social Security and Medicare) in addition to federal income tax. 

In this case, you will receive a 1099 form from your clients or platforms you work through, reporting your earnings for tax purposes.

Understand the Federal Tax Requirements for Remote Workers

The good news is that your physical location generally doesn’t impact your federal tax obligations. The IRS doesn’t care about your location as long as you are working within the US. You can file federal income taxes based on your total salary, irrespective of your work location. 

The tax brackets apply the same way as the in-office employees, so you will pay the same income tax as any other US taxpayer with the same salary.

Key Considerations

Whether you are a contractor receiving a 1099 or an employee receiving a W-2, your income reporting to the IRS and federal tax filing stays the same. If you’re classified as an independent contractor, you have to pay self-employment tax apart from federal income tax. This will cover both the employer and employee portions of Social Security and Medicare taxes.

The current self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare).

If you are working as a self-employed remote worker or have income sources outside of your regular paycheck (like freelancing), you might be required to make estimated tax payments throughout the year to ensure consistent tax payments and avoid penalties for underpayment at the time of tax filing.

Standard Deductions and Itemized Deductions

As a remote worker, you may be eligible for certain tax deductions. Alternatively, you can itemize the deductions if your total deductions exceed the standard deduction. Qualified remote workers are also eligible for specific home office deductions for a dedicated space in their home for work purposes.

We recommend checking the official IRS resources for detailed information on available deductions for both employees and self-employed individuals.

Recordkeeping and Staying Updated

Always maintain good records of your income and expenses for accurate tax filing. This includes keeping track of your earnings, business expenses related to your remote work (internet, phone, supplies, etc.), and any estimated tax payments made.

Also, check the IRS updates for tax guidelines and regulations periodically for the latest information on federal tax requirements for remote workers.

Learn About State Tax Obligations Based on Residency

The IRS doesn’t directly handle state income taxes. Each state has its own income tax regulations, and your residency determines which state has the right to tax your income. The IRS defines your residency based on your domicile, which is generally the state where you permanently reside.

Maintaining a voting registration, driver’s license, or mailing address in a particular state are some factors that can establish residency.

Remote workers living in a state with income tax will generally owe state income tax on their total income, regardless of the location of their workplace. For example, if you live in California (which has an income tax) and work remotely for a company located in Texas (no income tax), you’d still owe state income tax to California on your income.

The people working remotely in multiple states throughout the year have a more complex tax situation. Some states might have specific rules to trigger a tax filing requirement based on the amount of time spent working physically within the state. 

Hence, it is important to consult your state’s tax authority or a reliable tax professional for guidance on potential multi-state tax filing obligations. We recommend checking the official directory of state tax agencies to find the relevant information for your specific state.

Since state income tax rules vary widely, it’s critical to consult the tax authority in your state of residency, and potentially any other states where you work remotely for extended periods to ensure accurate filings and avoid penalties.

Filing Taxes When Working Remotely in the Different States

Working remotely across state lines can introduce complexities when it comes to tax filing. Below, we share a detailed walk-through of all the key considerations that you must keep in mind for accurate tax filing. Further, we recommend checking the official sources to stay updated with the most recent information and avoid penalties.

Domicile State vs. Physical Presence State Taxes

There are two main ways state income taxes work – residency (domicile) and physical presence.

Residency or domicile-based taxation applies to all income earned by a resident, regardless of where it is earned. As mentioned above, your state of residency is typically determined by your domicile, which is generally considered the state with your permanent residence.

The states with physical presence-based taxation laws tax the income for work performed physically within the state, even if you’re not a resident of that state. These laws often have specific time duration thresholds that you need to spend working in the state to trigger a tax filing requirement.

Navigating Multiple State Tax Filings Due to Remote Work

If you work remotely in multiple states throughout the year, and keep on telecommuting among states multiple times a year, your tax situation becomes complex. You might be liable to file tax returns in both your resident state and any state where you physically performed work and meet the filing threshold.

In such a case, you are taxed on the same income by two different states. This is where the concept of “reciprocal agreements”, discussed in the next section, comes into the picture.  Without such an agreement, you could end up paying taxes twice on the same income – once to your resident state and again to the state where you worked remotely.

How Reciprocal Agreements Affect Where You File and Pay Taxes

To avoid double taxation of remote workers, many states have reciprocal agreements that specify which state gets to tax your income if you work in multiple states that are included in that agreement.

The specific terms of these agreements vary across states, but they can significantly reduce your tax liabilities. You can claim an exemption from paying taxes to the state where you physically worked, as long as you meet the agreement’s requirements.

The IRS doesn’t maintain a central list of all state reciprocity agreements. You can find detailed information on such agreements on the official website of your state’s Department of Revenue or Taxation.

How Remote Workers Can Leverage Tax Reciprocity Agreements

As mentioned earlier, reciprocal agreements are a valuable tool for remote workers working in multiple states. These agreements act as a tax treaty between states, preventing double taxation on income earned by telecommuting remote workers in the US. Let’s explore some more details about these agreements.

Identifying States With Reciprocal Agreements

The IRS has no centralized directory of reciprocal agreements but it has a directory of state tax agencies, which can be a reliable starting point to begin your search. You have to check the official website of your state’s Taxation or Revenue Department to get the most reliable and official information. 

On the other hand, the rise of remote work culture has led to the emergence of many tax preparation software and online tax resources that can also offer information on reciprocity agreements. 

However, we recommend verifying the accuracy and freshness of this information by cross-referencing the details with your state’s official tax authority website.

The Process for Claiming Exemption Under These Agreements

Before we dive into the specifics of claiming exemption under a reciprocal agreement, it is important to note that not all states have reciprocal agreements, Also, not all the agreements cover all types of income.

The terms and conditions of the reciprocity agreements can change over time, so it’s important to stay up-to-date with your state’s tax laws. Consider taking professional help to avoid penalties and ensure accuracy in filing. 

Next, we share some general steps to claim exemption under reciprocity agreements between states. 

• Carefully review your state’s reciprocity agreements with other states. 

• Look for information, such as which states have the reciprocity agreement, types of income covered by the agreement (wages, salaries, etc.), and any specific requirements for claiming exemption, such as minimum income earned or time spent working in the other state.

• Gather necessary documentation such as proof of residency in your home state, paystubs or income statements from your employer for work performed in the other state, and a completed exemption form provided by your state’s tax authority.

• While filing your state income tax return, follow the instructions provided by your state for claiming exemption under a reciprocal agreement. 

Essential Tips for Remote Workers to Reduce State Tax Burdens

Now that you have a complete overview of how you can file taxes as a remote worker in the US, take a quick glance at some of the expert tips that can help you reduce your tax burdens.

Splitting Time Between States Wisely

Track your time in different states by keeping detailed records of the days you work remotely in each state. This will help you determine your tax filing obligations and potential benefits from reciprocity agreements. 

If you have some control over your work schedule and location, plan your remote workdays strategically, to minimize the number of your working days in states with high income taxes.

Whenever possible, prioritize working remotely from your state of residency to avoid triggering filing requirements in other states and potentially benefit from your state’s deductions or tax credits for remote workers.

Maximizing Remote Work Deductions and Credits

If you have a dedicated workspace in your home for exclusive work purposes, you can file for a home office deduction. The IRS allows deductions for a portion of your home office expenses like rent or mortgage interest, utilities, and depreciation of equipment or furniture.

Explore other potential deductions relevant to remote work, such as internet costs, phone bills, office supplies, and professional development courses. Some states offer additional deductions or credits specifically for remote workers. Research your state’s tax code to find out about such deductions, or get professional help from tax consultants.

Planning Your Residency for Tax Benefits

If you are clear about working as a remote employee/contractor as a long-term career, consider choosing a residency after checking its tax implications. While lifestyle factors are essential, researching state income tax rates and the availability of remote work-friendly deductions or credits in different states can help you unlock potential tax savings.

Professional Resources and Tools for Remote Work Tax Compliance

Navigating the tax complexities of a remote worker in the US can be overwhelming. Hence, we recommend taking help from reputed tax consultation providers, such as doola, to ensure compliance and potentially save money. 

doola specializes in tax consultation for freelancers, online business owners, founders, and business entity formation, and can help you save money, maximize deductions, and simplify your remote work tax experience.

doola simplifies the tax filing process for remote workers by gathering and managing relevant documents, ensuring proper filing in all necessary states, and handling communication with tax authorities. Our team helps you identify and claim all applicable deductions and credits related to your remote work setup, potentially reducing your tax liability.

doola provides access to free consultations with tax professionals who specialize in remote work tax implications. They can answer your questions, address specific tax challenges, and offer personalized strategies for optimizing your tax situation. This ensures you stay compliant with state and federal tax regulations, and free from the burden of navigating complex tax codes and filing requirements.

FAQs

What are the key tax obligations that US remote workers need to be aware of?

US remote workers need to understand federal income tax on all income earned, potential state income tax based on residency, and possible filing requirements in multiple states if telecommuting among multiple states.

How can I minimize my state tax liabilities as a remote worker?

To minimize state tax burdens as a remote worker, focus on working in your resident state, explore deductions, such as home office deductions, and research reciprocity agreements to avoid double taxation.

Which professional resources and tools can assist remote workers in staying compliant with state tax regulations?

We recommend opting for reliable services like doola to stay compliant with state tax regulations by simplifying filing, maximizing deductions, and offering expert guidance.