Filing Taxes as a Remote Employee

Thanks to the rise of the gig economy and technological advances that allow for true globalization of corporations of all types, more and more workers have the ability to work where they please. The office can now be in a home, the coffee shop down the road or even a beach chair.

By and large, employees love the flexibility afforded by remote work. They can do their jobs where they feel most productive and comfortable, break up the monotony of a day in a cubicle, avoid the time drain of a commute and more easily tackle personal errands on their lunch breaks.

Navigating Tax Time

There’s typically one time each year, however, that leaves remote employees frustrated, confused and even a little bit panicky. Tax time.

Federal and state taxes for remote employees can be a tricky subject. What’s worse, every remote employee’s situation is just a little bit different. Whether you’re an independent contractor, business owner or salaried employee, the state in which your company is headquartered, the state where you permanently reside and even why you’re working remotely are all pieces contributing to the puzzle that is filing taxes as a remote worker.

Ultimately, every remote worker will need to research his or her unique situation to determine how much is owed to whom, confirm taxes are being filed correctly, and ensure all deductions are being considered.

The Basics

Your “resident state” is the state where you claim a permanent address. This state will likely tax all your income, no matter where you earned it. A “non-resident state” is any other state that you didn’t live in during the taxable calendar year. That includes states where your company is headquartered, states where you performed remote work or states where you traveled for work.

If you work remotely as a salaried employee for a corporation that is headquartered in a different state than where you live, you might have to file multiple state tax returns … or you might just have to file one … or you might not have to file any.

Currently, there are nine income tax-free states:

  1. Alaska
  2. Florida
  3. Nevada
  4. New Hampshire
  5. South Dakota
  6. Tennessee
  7. Texas
  8. Washington
  9. Wyoming

State of Things

If the state where you live and the state where your company is headquartered are both included on the above list (or if they’re one and the same) you won’t have to file any state tax returns. But if you live or work in any of the other 41 states, you’ll have to file at minimum a resident tax return, and potentially a non-resident state tax return. If you’re a salaried employee, you need to file a tax return with each of the states listed on your W-2.

Yes, that means you may be getting taxed twice. Double taxation, also known as the “telecommuting tax,” happens when taxes are withheld from both your resident state and the state where your company is located. If this happens, you would file a return to your resident state reporting all income earned – no matter where you earned it. Then, you would file a return with the non-resident state reporting only income earned in that state. Frustrating, but there’s a silver lining: in most cases, your resident state will end up giving you a credit for the taxes paid to any non-resident state.

Filing Independently

When you’re a salaried remote employee, you may risk the headache of a double taxation, but everything else should be relatively painless, tax-wise. Because your employer takes care of taxes for you (even covering half of what you owe for Social Security and Medicare taxes), you don’t really have to think about them until it’s time to file. But as a self-employed remote employee, there’s a lot more to consider.

Do you need to file quarterly? Do you have all your 1099s? Did you make a profit? Did you save enough to cover everything you owe, including all the Social Security and Medicare taxes? Should you hire a professional? Are you claiming enough deductions … or too many?

Deduction Opportunities

Here’s a (noncomprehensive) list of the things to consider to claim as deductions if you are self-employed:

  • Your home office. Provided it’s a dedicated portion of your home, you can deduct the percentage of rent or mortgage interest (but not mortgage payments) that the home office takes up, in addition to the utilities the space consumes.
  • Business-essential office supplies, furniture, software and services. Keep track of how much you spend throughout the year on notebooks, your printer and printer paper, desk, desk chair, computer, webcam, smartphone, specialty professional gear, software, internet service and more. If buying it was essential to performing the duties of your business, it’s deductible.
  • Travel costs. Driving or flying to visit clients or potential clients is deductible. Keep your receipts for mileage, airfare, hotel bills, parking fees and other related expenses.
  • Business-related meals/entertainment. Thought the IRS will generally limit these claims to 50 percent of the costs, you can claim business-related events such as dinner and coffee with prospects and maybe even holiday gifts for clients … all within reason.
  • Training and education. If you took any professional development courses or attended any industry conferences, you can deduct the costs.
  • Marketing and advertising. This includes the hosting service for your business website, business cards, and related branded and promotional materials.  
  • Professional services. Like the people who designed those business website and business cards. Or the attorney who looked over the contract from a new client. Or the IT professional who recovered documents on your crashed computer. Or the CPA you might hire to help with your taxes after reading this blog post.
  • Health insurance. If you’re self-employed, claiming a profit for the year and your family wasn’t eligible for coverage under any other employer, you can deduct 100 percent of health insurance costs for yourself, your spouse and your dependents.  

Ask a Tax Professional

Do these same deductions apply if you’re a salaried employee working exclusively remotely? Not always. The IRS mandates you have to be working remotely “for the convenience of the employer” – that is, required by the employer to work remotely. If your company is entirely virtual and has no office, this stipulation might apply to you (although it’s still worth checking with a professional.)

Don’t let all the tax complications that accompany working remotely scare you away from the opportunity. For most people, the good far outweighs the bad. With some careful planning, organized expense tracking, and maybe the help of an experienced professional, you can correctly file all the taxes you owe as a remote employee and continue enjoying the perks of the arrangement all year.

 

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