Although remote workers often enjoy increased flexibility and work-life balance, tax obligations for remote workers vary greatly based on working location(s), residential location, and employment classification. Whether you work as an independent contractor from a different state than your employer or as a remote full-time employee for a company operating in your home city, you will need to consider everything from multi-state taxation to local tax obligations, eligibility for deductions, and much more.
In this remote worker tax guide, we will explore how to responsibly manage taxes for remote employees, providing guidance for individual remote workers as well as employers with a growing remote workforce and an investment in remaining legally compliant.
How to Determine Tax Liability Based on Location – State Taxes
Remote workers in the United States are required to file federal and state taxes. Federal taxes are based on where a remote worker physically works, regardless of where the employer operates. In contrast, state and local tax requirements can be significantly more complicated, especially as policies continue to change rapidly based on public health and economic challenges. Let’s explore common remote work scenarios and how to fulfill state tax obligations as a remote worker or employer with remote workers.
Working for an Employer in One State While Living in Another
Remote workers must pay tax on their entire income to the state where they reside, assuming the state has personal income tax requirements. If a remote worker’s out-of-state employer withholds income for state taxes, the remote worker can usually claim a tax credit equal to the amount paid to their nonresident state. This approach applies to most states and prevents double taxation of remote worker income.
However, in a number of states, including Arkansas, Connecticut, Delaware, Nebraska, New York and Pennsylvania, state taxation of remote worker income depends on a “convenience of employer” test. Essentially, if an employer requires a nonresident worker to operate remotely/out of state for legitimate business reasons, the worker’s nonresident state tax obligation is restricted to the worker’s actual physical location. If a remote worker is working in another state purely out of convenience, this income could be taxed by the employer’s state.
Even among the six states listed above, criteria for the “convenience of employer” test differs, so we advise remote workers and their employers to review Department of Revenue guidelines and requirements that apply to your (or your remote workers’) state, or contact us directly for support with this process.
States Without Income Tax Requirements
In Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, state income tax on earned income is not required. If you are a remote employee who completes work in these states and does not complete work in another state with state income tax requirements, you only need to file a federal tax return.
Among the states listed above, New Hampshire and Tennessee (in some cases) require state taxes on investments and income outside of wages. For example, in New Hampshire, some self-employed workers and independent contractors may be required to pay state taxes on income under select circumstances, and employer new hire reporting requirements now include all remote workers.
Reciprocal Agreements & Nonresident State Tax Returns
17 states use reciprocal agreements in 2023 to streamline taxation between states, with an emphasis on remote workers and workers who travel between locations. Under a reciprocal agreement, remote workers do not need to file nonresident state tax returns, and must only pay to one state. Reciprocal agreements mainly exist between states with shared borders. The easiest way to determine whether your working situation qualifies for exclusion from non-resident state tax is to search for the two states (where you work and where your company is based) to determine whether reciprocity exists.
The following states and districts operate with reciprocal agreements that bypass the need for double taxation of remote workers: Arizona, Indiana, Iowa, Illinois, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, Wisconsin, and the District of Columbia (D.C.).
In general, remote workers must only file a nonresident state tax return if they travel to other states and work from there. This is applicable among states without reciprocal agreements that require state income tax or when the remote worker does not pass the “convenience of employer” test.
Like state taxes, local, county, and municipal tax policies vary significantly, including for remote workers and remote employees. In some cases, local laws may be even more stringent or complex than the state laws in effect, which can affect individual tax filing and payroll/tax management for employers. Working with a qualified payroll provider simplifies the process for employers that employ a range of remote workers, remote employees, and international contractors, ensuring long-term legal compliance.
For remote workers and their employers, it’s essential to avoid misclassification and understand status as either an employee or contractor. Employment status should be clearly articulated in writing before any new hire, especially since it has a direct impact on compliance and tax filing.
Although working remotely is sometimes conflated with self-employment, they are not the same. Any remote worker who receives a W-2 from their employer is technically an employee and must abide by local, state, and federal filing requirements that align with that classification. It’s equally important to review what constitutes an independent contractor (self-employed status) classification for filing purposes, including eligibility for deductions.
Which Deductions Are Available to Remote Workers
Self-employed remote workers (independent contractors) are eligible to use the home office deduction, which allows remote workers to write off part of their home office expenses during tax filing. Remote workers may also be eligible for other special deductions related to job-related expenses (software costs, subscriptions, travel costs and more) resulting from remote or off-site work. Remote workers who receive a W-2 and are technically classified as employees are ineligible to capitalize on work from home tax deductions.
Simplified Payroll and Tax Management for Your Remote Workforce
Adhering to a wide range of local, state, and federal tax filing requirements can be a challenge for individual remote workers and their employers. That’s why we offer personalized tax planning and compliance services for businesses – adapting to the needs of your organization based on jurisdiction, size, and the configuration of your workforce.
Ready to streamline payroll and tax compliance so you can focus on business growth and employee satisfaction? Start the process today.