Taxes are complicated enough as it is, but add in the concept of remote work, and it’s enough to drive you mad. Especially if you’ve never worked from home before. So before the tax man comes for his cut this April, learning where and how to pay remote work taxes is in your best interest. Use this complete guide to remote work taxes to avoid penalties, interest, and hassles, all while giving yourself some extra peace of mind.
Where Do I Pay Remote Work Taxes?
As long as you make at least $12,950 per year as a remote worker, you must file a federal tax return. However, state income taxes is where the confusion sets in. If you live in one state, but your employer is based in another, where do your remote work taxes go?
Generally speaking, you only pay taxes in the state where you reside if you’re a remote worker. So if you live in New York, but your employer is headquartered in California, you only need to pay taxes in New York.
Occasions Where You May Have to Pay Additional State Taxes
Despite the general idea that you only pay taxes in your state of residence, a few situations may arise where you have to pay remote work taxes in multiple states:
- You travel on occasion to another state to work
- Your employer is located in a convenience-rule state
Travel to Another State
Depending on how often you travel to the other state and the state’s tax laws, you may have to pay additional remote work taxes to that state as well as your state of residence. Rules are different for every state, so you may want to read up on state-specific tax laws, brackets, and other information.
Convenience-of-Employer States
Convenience-rule states employ what’s known as a convenience-of-employer rule. This means that if an out-of-state employee works for a company based solely on the convenience of the company, the company must withhold state income tax. In this case, a person may be subject to double taxation — state income tax in the state reside, as well as where their employer is headquartered.
The good news is that this is less complicated than you may think simply because there are only six convenience-of-employer states as of 2023:
- Arkansas
- Connecticut
- Delaware
- Nebraska
- New York
- Pennsylvania
If your employer is located anywhere outside of these states, the convenience-of-employer rule doesn’t apply — which means more money in your pocket at the end of the year.
What Are the Best States for Remote Work Taxes?
Simply put, the best states for remote work taxes are the ones that don’t have the convenience-of-employer rule — but more importantly — those that don’t have any state income tax at all. Currently, seven states have no income tax:
- Alaska
- Florida
- Nevada
- South Dakota
- Tennessee
- Texas
- Wyoming
New Hampshire is also a great state for remote work taxes, as it only taxes capital gains from investments but not earned income from your job.
Remote Work Taxes for 1099 Workers
In most situations, your employer withholds federal and state remote work taxes. As an employee, that means you rarely have to worry about paying them. It’s automatic.
But if you’re a contractor or freelancer, things are a bit more tricky. These employment arrangements require you to file your own taxes. Therefore, knowing how much to pay is essential to avoid penalties and late fees. You still pay income taxes contingent on how much you earn, which is known as your tax bracket. You will find this amount on the 1099 you receive from your client(s).
However, you also have to pay a 15.3% self-employment tax by federal law. This includes a 12.4% Social Security tax and a 2.9% Medicaid tax. Although you pay this extra amount, you can deduct half of the percentage — 7.65% — off your taxable income.
Beyond state and federal taxes, your local city or county may also levy a local income tax. This isn’t common; only 17 states and the District of Columbia have local income taxes, ranging from 0.38% in San Francisco to 8.5% in DC.
Digital Nomad Taxes
Digital nomad taxes may appear like a further complication to your remote work taxes. But rest-assured, they work almost exactly the same as if you were living in the United States. Despite some of the information you’ll gather online, you do not need to pay taxes when you work remotely in another country in almost all cases. Moreover, the 51 countries and territories that offer a digital nomad visa waive any remote work taxes for digital nomads, eliminating any red tape or uneasiness you may have.
The Foreign Earned Income Exclusion Advantage
If you plan on staying abroad for a year or more, the Foreign Earned Income Exclusion is something to take advantage of. If you’re abroad for 330 days in a 365-day period and earn $120,000 or less, you don’t have to pay federal taxes and you may not have to pay state income taxes. Yes, you read that right!
You’re still on the hook for self-employment taxes, and you cannot contribute to an individual retirement account (IRA) for that year, but you can certainly make up for that with the extra cash you save.
How To Avoid a Giant Tax Bill
If you want to avoid a giant tax bill — primarily as a freelancer or contractor — learning the basics of remote work taxes and some hacks is tantamount to success. To avoid any potential shortfalls, lower your tax liability, and put more money in your pocket, apply these tips:
- Pay quarterly estimated income taxes. This not only puts you on track so you don’t have a giant tax bill at the end of the year, but it also helps you avoid any penalties for late payments.
- Take every deduction you can get, including office supplies, the home office deduction, work-related utilities such as internet or phone, and others.
- Contribute all that you can toward a retirement plan — either an IRA or 401(k).
- Hire a professional as necessary, as they can take the hassle out of some of your tax issues or problems.
Be Safe, Not Sorry
If you’re still not sure how to pay your remote work taxes as an employee, freelancer, contractor, or digital nomad, always err on the side of caution. Due to the growing popularity of remote work, many tax firms now have professionals specifically versed in remote work taxes. If you have questions or you just don’t want the hassle, hiring one of these firms isn’t a bad move on your part. Like any other business, just make sure that you find a reputable company with experience and a proven track record.
Don’t Panic!
Although taxes are a rightful cause of stress, do everything in your power to avoid a freakout. Panic exacerbates the issue and can make the process even more of a headache. However, proper planning, knowing where and how to pay taxes, and doing so on time can put you on cruise control come tax time. The only thing you’ll need to worry about is where to spend your tax return.
Do you work remotely? How do you manage your remote work taxes? Connect with Virtual Vocations on Facebook, Twitter, LinkedIn, Instagram, and YouTube to share your thoughts and tips. We’d love to hear from you!
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