Where do remote employees pay taxes?
by Preston on 2020-07-17
Remote employees can work from anywhere in the world. Like most advantages, though, that freedom comes with responsibilities.
While taxes for remote workers are usually not more complicated than those for traditional office workers, most educational resources on taxation cater to people in traditional environments. People who work from home (or nomadically) don’t always have access to the information they need. If you work remotely or have employees who do, this guide can help you stay compliant no matter where you call HQ.
Remote worker taxes in the United States
Workers in the United States usually file two types of taxes: state and federal. At the federal level, U.S. workers pay taxes based on where they physically work, not where their employers operate.
State taxes are more complicated. A person who lives and works remotely in Washington, for example, can perform work for a company that is based in California without having to pay California state taxes. However, remote workers who travel to other states and work from there may have to file a nonresident state tax return. Remote workers do not have to file nonresident state tax returns unless they physically travel to another state and perform work while they are there. In certain cases, a reciprocity agreement may protect workers from taxes in different states.
Not all states levy a state income tax. In 2020, employees are free from state taxes in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. The state constitution of Texas outright forbids its government to create a state income tax. Remote workers in these states who do not perform work in other states only have to file federal tax returns.
Workers in New Hampshire and Tennessee may be subject to state taxes on investments and other income, but these states do not charge state taxes on wages. Unlike full- and part-time employees, self-employed and contract workers in New Hampshire may be subject to state taxes on their income in certain situations.
For remote workers in the U.S., physical location remains the determining factor for which taxes workers pay. Employers who hire employees outside their home states must fulfill their duties to withhold state taxes on a state-by-state basis.
Remote worker taxes outside the United States
Every country in the world operates under its own tax code. Attempting to summarize international tax laws in a few paragraphs would be as hopeless as counting grains of sand on a beach. For now, let’s stick to tax liabilities for remote workers who live outside the United States but work for companies based in the U.S.
The United States does not levy taxes against non-U.S. citizens living outside the country who work for U.S.-based businesses. If you are a citizen of the United States working remotely from another country, you may need to fill out some forms, but in most cases, you only owe taxes in the country where you live and work. U.S. citizen high earners (above $100,000 per year) may owe U.S. taxes even while working abroad, though. Either way, U.S. citizens working overseas should still plan to file tax returns, even if they don’t owe anything.
Businesses in the U.S. cannot hire workers in other countries directly. For a U.S. company to hire a person living abroad, that company must either go through the long and difficult process to open its own local legal entity (which can take months and cost thousands of dollars) or employ the worker using an employer of record, or EOR, such as Remote.
Without an EOR, most U.S. companies choose to treat international employees as independent contractors. This can cause a host of problems for workers and businesses if they are not careful. People who work as contractors must generally be free from restrictions about when they work, how they receive payments, the rates they charge, and whether they can work for multiple companies. Workers who do not meet the definition of contractor may be considered employees under local jurisdictions.
Misclassification of employees in this way can lead to massive penalties for the offending companies, both within and outside the U.S. Both parties should sign a document that clearly outlines the nature of the relationship and regularly evaluate the relationship to ensure that nothing has changed.
People living outside the U.S. who work as independent contractors must remember to save money for their own taxes. Employers generally do not withhold any taxes from contractors or make payments to government entities on their behalf. Tax rates for contractors vary from country to country, so contractors should consult local guidelines for specific tax rates and savings tips.
How remote workers can pay less in taxes
Remote workers both within and outside the U.S. have several opportunities to limit their tax liability. Here are a few suggestions:
- Know your status as a contractor or employee. Don’t assume the nature of a relationship if you haven’t clarified it in writing. Look up local laws about what distinguishes contractors from employees and ask your employer how you are classified. Employers who discover they have misclassified a worker must act swiftly to correct the issue.
- Familiarize yourself with local tax laws. Countries, states, regions, and cities all have different laws and requirements regarding income taxes. Before you move to a new area and file taxes there, seek information about local laws. In many cases, employees may find it cheaper and easier to work with a tax professional than to navigate uncharted waters. Employers with international employees and contractors usually need third-party assistance from a PEO or an EOR to stay compliant.
- Ask your employer to hire you through an EOR. People who work outside the U.S. as contractors or employees don’t always get the support they need. By offloading payroll, benefits, taxes, and compliance to an EOR, such as Remote, companies can guarantee compliance with local labor and tax regulations while providing a better experience for their international teams.
Remember, it’s not all about finances
Taxes make up just one part of the enormously complex equation of working and hiring internationally. Workers must tackle issues like visas, culture shock, and language barriers. Businesses, meanwhile, must contend with issues of payroll, benefits, and compliance.
People deserve to live and work for great companies no matter where they live. That’s why Remote exists: We help businesses hire workers all over the world by handling payroll, benefits, taxes, and local compliance. Check out our countries page to discover all the places we help businesses work with top global talent.