Remote Work Taxes: What US Workers Need to Know Before Filing

Remote work tax laws depend on a number of factors, especially employee classification (e.g., independent contractor vs. full-time employees). Many US-based employees may ask themselves how taxes work when I work remotely in another state?  Keep reading to learn more about how to classify your workers and file appropriate taxes compliantly. 

What Remote Work Taxes are Employers Responsible For?

In the US, employers have certain tax responsibilities related to remote work. Here are some of the tax implications that employers are responsible for when employees work in another state. 

1. Payroll taxes: Employers are responsible for withholding and paying payroll taxes, including Social Security and Medicare taxes, federal, and state taxes from the wages of their employees.

2. Unemployment taxes: Employers are required to pay unemployment taxes to the state in which their employees work. This applies regardless of whether the employee works in the employer's physical office or remotely.

3. State income taxes: If the employer has employees working remotely in another state than where the employer is located, the employer may be responsible for withholding and paying state income taxes in those states. Different states have varying tax laws, but most of the time employers shouldn’t worry about double taxation. 

4. Workers' compensation insurance: Employers are typically required to carry workers' compensation insurance to provide benefits to employees who are injured or become ill due to their work, even for remote workers. The requirements for workers' compensation insurance vary by state.

5. Disability insurance: Some states require employers to provide disability insurance to employees which helps provide income replacement for employees who are unable to work in case of a non-work-related injury or illness that may affect their everyday life.

6. Nexus: Employers are typically only required to withhold and pay taxes in states where they have a physical presence or "nexus.” If they have remote employees in other states outside of where their home office is located, they may need to register to do business in those states and withhold and pay taxes according to state and local laws.

How are Employees Taxed When Working Remotely? 

Remote work can have different implications for taxes, both for the employee and the employer. Employees should always ask their employer how they file taxes every year and what rules and regulations apply. Employees want to know exactly what state they’re considered a tax resident in before filing their taxes.

Key Considerations:

• State income tax: If you are working remotely from another state different from your employer's location, you may owe state income tax in both states. Some states have reciprocal agreements, meaning you only owe income tax in your home state, but not all states have such agreements.

• Local taxes: Depending on where you live and work, you may owe local taxes in addition to state and federal taxes.

Does Working Remotely Make Me Self-Employed? 

Working remotely does not make you self-employed. Whether you are an employee or self-employed depends on the nature of your working relationship with your employer. 

You’re usually an employee if: 

• You work remotely for a company

• You are paid a salary or an hourly wage

• The company has control over your work

• The company sets your schedule

• The company provides you with tools and resources needed to do your job

• You are likely considered an employee of the company

• In the US, your employer will have you fill out a W-2 for tax purposes

On the other hand, if you work remotely as a freelancer or independent contractor: 

• You are paid on a project or contract basis

• You have control over your work

• You set your own schedule

• You provide your own tools and resources

• You are likely considered self-employed

• Contractors can claim more tax credits when filing taxes

In the US, the company you freelance for should have you fill out a 1099 form to ensure you’re paying the proper taxes and classified correctly. It's crucial to properly classify your employees. If any compliance issues arise with your independent contractors, you could face legal repercussions.  

Do Independent Contractors that Work Remotely have to Pay Taxes?

Independent contractors who work remotely always have tax obligations related to their work.

Here are some common taxes that independent contractors may be responsible for:

1. Self-employment tax: Independent contractors are typically considered self-employed, meaning they are responsible for paying self-employment taxes (Social Security and Medicare taxes) on their personal income.

2. Federal income tax: Independent contractors are responsible for paying federal income taxes on their earnings. They may be required to make estimated tax payments throughout the year to avoid underpayment penalties.

3. State income tax: Independent contractors may be required to pay state income taxes in the state in which they live and work.

4. Local taxes: Some cities and counties may have local income taxes that independent contractors may be required to pay.

Are there Special Deductions for Remote Workers?

In the US, there are no special tax deductions exclusively for remote workers, but there are some tax deductions that may be available to remote workers depending if they work as a freelancer or are considered self-employed. 

Here are some deductions that may be relevant to remote workers:

1. Internet and phone expenses: Remote workers may be able to deduct a portion of their internet and phone expenses that are used for business purposes. However, the deduction is limited to the percentage of time the internet and phone are used for business purposes.

2. Travel expenses: If remote workers travel for business purposes, such as attending a conference or meeting with clients, they may be able to deduct the expenses associated with that travel, such as airfare, lodging, and meals.

3. Education expenses: If remote workers take courses or training related to their job, they may be able to deduct the costs of those courses as a business expense.

4. Professional organization fees: Remote workers who belong to professional organizations related to their job may be able to deduct the membership fees as a business expense.

Justworks Can Help Manage US Employees

Choosing the right payroll provider to help you expand your business in the US can be a game changer. It’s hard to know where to start when hiring remote employees in the US. With Justworks, we ease the process and ensure compliance with individual state laws. We have HR experts to help small businesses manage remote employees.

Learn more about how you can expand your business through Justworks, and get started today.