How and where do remote workers pay taxes? A complete guide

According to the Bureau of Labor Statistics, one in five employees in America works remotely. For some, that means a home office halfway around the world from company headquarters. For others, it means telecommuting for half the week across multiple states. 

Remote and hybrid work can improve employee productivity and help employers access a larger talent pool. But they also pose some unique challenges when it comes to compliance. Payroll, in particular, gets complicated when you cross boundary lines. In this article, we’ll explore some of the nuances of taxation for remote employees and offer suggestions for best practices to simplify national and international payroll. 

How are remote workers taxed?

Just like traditional employees, remote workers pay taxes according to local, state, and federal laws. Understanding which laws apply to remote workers, however, can get complicated, particularly for individuals working abroad. 

To determine where a remote worker may have tax obligations, start by considering the following factors:

• Employer’s location. Some states apply a “convenience of the employer” rule to tax employees of businesses in that state, regardless of the employee’s resident state. 
• Remote worker’s place of residence. Some US states don’t levy any state income taxes or local taxes, and foreign countries have their own tax codes to consider.
• Time spent at different locations. Depending on how much time an employee spends working in a different state or country, they may qualify as a resident and become subject to different tax obligations than they would in the place they call “home.” 

If I work remotely, where do I pay taxes?

If you work remotely, you’ll usually pay state income taxes in the state where you live. Different states apply different rules, however, and the location of your employer and your place of residence can impact what you need to pay and where. 

If you work from Austin for a Boston-based business, for example, you may find yourself paying state income taxes to Massachusetts, even though Texas doesn’t impose them.

Payroll taxes for out-of-state workers

Like the federal government, many US states levy an income tax to fund important social programs and projects. For employees living and working in the same state, calculating correct withholdings involves a single set of rules and regulations. However, once remote workers enter the mix, payroll processes and compliance workflows need to account for multiple requirements.  

Example:  Your San Francisco-based company employs several workers who live in Portland. When calculating payroll tax withholdings, you’ll need to consult California and Oregon law to learn how each state taxes employees, determine whether a reciprocity agreement exists, and apply any tax credits. 

That said, the following US states don’t levy a personal income tax:

• Florida 
• Nevada
• Alaska
• Washington 
• Texas
• Wyoming
• Tennessee 

Do I have to pay taxes in two states if I work remotely? 

If you live and work in two different jurisdictions, you’ll need to review state tax laws carefully to understand your tax liability. 

While some states have reciprocity agreements to protect against double taxation that allow people who live and work in different places to pay income taxes only in their state of residence. Others, like those listed below, apply a “convenience of the employer” rule:

• New York
• Connecticut 
• Delaware 
• Nebraska
• Pennsylvania
• Arkansas 
• Massachusetts

Under a “convenience of the employer” rule, employees who work remotely at their employer's request or for their employer's convenience receive different tax treatment than those who work remotely by choice. 

Example: Your employer is incorporated in New York but has no physical office space. You live and work in Philadelphia. In this case, you work remotely for the convenience of your employer, and New York will not claim taxes from your income.

Example: Your employer is incorporated and has an office in Arkansas. You work remotely from Georgia out of preference. Arkansas may apply the “convenience of the employer” rule and levy state income taxes on your earnings. 

Remote work taxes for global employees

Opening your organization to remote work expands your talent pool to include the entire world but also comes with unique tax challenges. The following rules of thumb can help in understanding where your employees abroad pay taxes. However, we suggest consulting with a tax specialist for iron-clad clarity:

• International employees. Foreign nationals employed by American companies through an EOR pay taxes in their country of residence or origin, depending on applicable laws. Your EOR must also ensure that your organization meets its payroll tax obligations in those foreign countries.
• International contractors. Global contractors working with US-based businesses on a contract basis will pay taxes in their country of origin. 
• US citizens working abroad. American citizens working for US-based businesses but living abroad generally pay taxes only in their country of residence. However, employees who earn more than $100,000 per year may owe US taxes.

Remote work tax considerations for employers 

Navigating the complexities of international and local tax law can feel overwhelming. Familiarizing yourself with key concepts can help demystify the relationship between different jurisdictions’ rules and requirements. 

Reciprocity agreements 

Reciprocity agreements protect individuals who live in one state and work in another from paying state income taxes in two states. For example, Michigan and Wisconsin have a reciprocity agreement, which means someone living in Ann Arbor and working for a company in Madison will only pay state income taxes in Michigan.

Permanent establishment 

Depending on the extent of an organization’s activities in another state or country, regulators may consider the organization to be ‘doing business’ or ‘permanently established’ in that jurisdiction and subject to its laws and regulations.

Tax withholdings

Employers must register with state income tax authorities in every state where they employ workers and owe payroll taxes. For instance, a company with offices in Charlotte that employs a remote marketing team based in Atlanta will need to register with the Georgia Department of Revenue and the North Carolina Department of Revenue. 

Reporting requirements

Each jurisdiction has its reporting requirements, and these can vary considerably. Many European countries require comprehensive monthly breakdowns of an employer’s contributions to social security programs, whereas the Internal Revenue Service in the US generally requests this information once a quarter.  

Remote work taxes: 6 best practices for employers and employees

Managing payroll and tax withholdings for remote employees can be tricky for employees and employers. The best practices below can help both remote workers and organizations handle common payroll, withholding, and compliance challenges.   

Tips for employers

Register employees in applicable States

If your team of remote workers includes W-2 employees, check state laws to ensure that you comply with payroll tax, wage and hour, PTO, and other requirements. Depending on the state’s definition of “doing business” and your organization’s activities, you may also need to register your organization and obtain a business license, even if you don’t maintain a physical presence in that state.  

Understand how to fill payroll tax returns 

While the IRS tries to make completing your payroll tax returns as straightforward as possible, Form 941 comes with a hefty list of instructions and exceptions. If your HR team doesn’t include a payroll specialist, it can help to devote dedicated time to training and review for the person responsible for completing and filing payroll tax returns. 

Consider an EOR

An Employer of Record (EOR) is a third-party company that acts as the legal employer of your workforce, taking on HR responsibilities on behalf of your organization. This can free up your team to focus on strategic initiatives that drive growth. They can be especially helpful for US-based businesses interested in hiring employees abroad.

If your organization relies heavily on remote employees, allowing an EOR to handle complex international compliance issues can help reduce the stress on your HR professionals.

Tips for employees

Know your tax classification

Whether you qualify as a W-2 employee or a 1099 contractor has big implications, and it’s important to understand your tax classification correctly. 

If you’re a W-2 employee, you should receive regular paystubs itemizing payroll tax withholdings for things like FICA, health insurance, and federal income taxes. You should also see employer contributions to federal and state unemployment insurance programs. Double-checking the amounts withheld can save you and your employer a headache come tax season. You’ll also want to take extra care when completing your Form W-4.

If you’re a 1099 contractor, you’ll be responsible for your FICA contributions and insurance, so it’s important to know how much you should expect to pay and plan accordingly. 

Understand local laws 

Laws regulating the relationship between employers and employees vary from state to state—sometimes even city to city—and both parties need to know their rights and responsibilities to avoid confusion. What’s perfectly acceptable for an employer in Nebraska might not pass muster under California law, for example, and remote workers should have the knowledge needed to offer suggestions or corrections.  A Los Angeles-based worker might need to educate HR in Lincoln regarding California’s requirement that employers reimburse specific business expenses.

Report location changes

As we’ve noted, employment laws at the state and local level change as you cross jurisdictional lines. If you’re a digital nomad who routinely moves from one location to another, inform your employer as soon as possible to ensure they follow the correct rules when calculating overtime, withholding payroll taxes, or scheduling paid time off. 

Manage payroll for remote workers in the US and overseas with Rippling

Whether you’re managing employee payroll across state lines or international borders, Rippling can help. Rippling Global Payroll simplifies payroll management for remote workers by integrating with your existing HR and payroll systems to streamline and automate the payment process across multiple countries.

• Consolidate your employee data. Rippling is built with employee data as its single source of truth, giving you real-time access to information you need for accurate payruns, including time and attendance, PTO, and benefits allocations.
• Automate the payroll process. Rippling allows you to build custom workflows to automate nearly any payroll task, including global pay runs, using triggers and events unique to your organization.
• Manage international payroll. Rippling Global Payroll issues compensation in local currency and completes required tax documentation for each country.

FAQs on remote work taxes

What is a remote employee, according to the IRS?

According to the IRS, a remote employee is any worker whose activities you control who performs their duties in a location other than an office operated by your organization. In plain English, you have a remote employee if you control when and how someone works and that person carries out that work somewhere other than your offices.

Can I write off my internet bill if I work from home?

Yes, you can write off your internet bill if you work from home if you’re a self-employed small business owner or contractor. W-2 employees are not eligible for the home office deduction, however. 

How does working from home affect your taxes?

How working from home impacts your tax return depends on whether you qualify as a W-2 employee or work as a self-employed small business owner or contractor. W-2 employees can’t claim deductions for work-related expenses but benefit from employer contributions to FICA taxes. On the other hand, self-employed workers can deduct qualifying business expenses but are responsible for 100% of FICA.

Does working remotely make me self-employed?

No, working remotely does not, on its own, make you self-employed or an independent contractor.

This blog is based on information available to Rippling as of September 17, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.