This article will break down applicable taxes, explain how rules vary by location, and outline key considerations for both workers and employers. Many remote workers frequently ask, “if I work remotely where do I pay taxes?” – and the answer depends on several factors we’ll explore below.
Understanding remote worker classifications for tax purposes
Before diving into tax regulations, it’s essential to identify how remote workers are classified. This understanding helps businesses maintain compliance and individuals manage their tax liabilities.
By work classification
Employees (W-2): These individuals work under the direct control and direction of an employer. Employers are responsible for withholding payroll taxes and paying payroll taxes (Social Security, Medicare, and unemployment). Unlike traditional employees who work on-site, remote employees may face additional tax complexities when working across state lines. Employees may also be eligible for benefits based on state laws.
Independent contractors (1099-NEC): Operating as self-employed workers, contractors have control over how and when they work. They are responsible for paying their own taxes, including self-employment tax. Employers do not withhold taxes but must issue a Form 1099-NEC for payments over $600.
📌 Misclassifying a worker can lead to significant tax penalties. For more details, see our article: “10 Things Every Employer Should Know About Employee Misclassification.“
By location and work situation
Cross-state commuters: These individuals live in one state but regularly work in another. They may owe taxes in both states unless they have a reciprocal tax agreement.
Home-based remote employees (out-of-state): These employees live and work from a different state than their employer’s location. Generally, they are taxed in their state of residence. However, in “convenience of the employer” states (e.g., New York, Pennsylvania), they might also owe taxes to the employer’s state unless their remote work is a requirement of the employer. But more about it later.
Temporarily remote workers: These are typically based in one state but work short-term from another. Tax rules vary widely; some states impose taxes even for brief stays. If the stay is extended, the worker may be considered a part-year or full-year resident for tax purposes in the temporary state.
How your work location impacts your taxes
The state where you live and primarily work usually determines your tax obligations. Remote work, however, adds a layer of complexity to how remote workers pay taxes.
If you’re a remote employee: You generally pay income tax in your state of residence. If your employer is in a different state, you might also owe nonresident taxes in that state, especially if it has a “convenience of the employer” rule. Check whether your employer’s state applies nonresident income tax or a “convenience rule.”
If you’re an independent contractor: You pay taxes to the state where you live and perform the work. The location of your clients in other states typically does not alter where you pay state taxes.
The “convenience of the employer” rule explained
Let’s talk about the “convenience of the employer” rule a bit more. It’s a state-level tax regulation that affects certain remote workers. It dictates which state can tax your income if you live in one state but work for a company based in another.
The core principle: If you work remotely because your employer requires it, your income is typically taxed by your state of residence. However, if you work remotely purely for your personal convenience, your income might still be subject to taxation by the state where your employer is based. In essence, you could owe personal income tax to your employer’s state even if you don’t live or work there, if your remote work is by choice, not by mandate.
So why does this rule exist? States apply this rule to protect their tax revenue. It ensures that if an employee could be working in the employer’s state but chooses not to, the employer’s state still receives its share of tax revenue.
Important: Each state may interpret or enforce this rule differently. For example, if you live and work in California but your employer is based in New York, New York may still tax your income due to its convenience rule, even if you are not physically present there.
Avoiding double taxation
The U.S. tax system generally aims to prevent double taxation. If multiple states claim a right to tax the same income:
- Your resident state may offer you a credit for taxes paid to the other state.
- Some neighboring states have reciprocity agreements, meaning you only pay taxes in your home state.
However, you will likely need to file taxes in both states – one as a resident and one as a nonresident.
Local taxes: don’t forget city and county levies
Beyond state taxes, be aware that cities and counties can also impose local income taxes. For instance:
- New York City and Philadelphia have local income taxes.
- Some Ohio cities also require local tax filings.
Whether you’re a remote worker or self-employed, always check local tax laws for your specific area of residence.
Remote worker taxes outside the US
Hiring remote workers outside the United States introduces unique tax implications for both businesses and workers, often involving complex international tax laws.
Non-US citizens living abroad: Generally, non-US citizens living abroad who work for US-based companies are not subject to US income tax. They pay taxes in their country of residence according to local laws. For example, a designer in Germany working for a US company would pay German income taxes.
US citizens living abroad: US citizens living abroad must still file a US tax return annually. Those earning above a certain threshold (currently around $120,000) may owe taxes to the IRS. However, many can utilize provisions like the Foreign Earned Income Exclusion (FEIE) to reduce or eliminate their US tax liability. For example, a US software developer in Japan would still file with the IRS, even if they qualify for exclusions and owe no additional taxes.
Tax responsibilities for freelancers and independent contractors
If you’re self-employed, your tax obligations differ from those of traditional employees. You’re responsible for:
- Self-employment tax: This covers your Social Security and Medicare contributions, currently 15.3% of your net income.
- Federal income tax: You’ll need to estimate and pay this quarterly, based on your earnings.
- State and local taxes: These are paid in the state and locality where you live and work, similar to employees.
- Business deductions: You may qualify for various tax write-offs, including: a portion of your home internet and phone bill, business travel expenses, continuing education or professional training, fees for professional memberships or platforms.
Our advice? Always maintain clear records and receipts to substantiate your deductions.
Temporary moves and tax implications
Let’s talk about this scenario: you temporarily change states, whether to test a move or travel while working. What should you do then? Note that tax laws may not always treat these moves as temporary.
- If a worker stays in a new state long enough, they may be considered a part-year resident and owe taxes there.
- Workers who move should formally establish residency by updating their driver’s license, voter registration, and mailing address.
- Both employers and freelancers should diligently track where work is performed, as it directly impacts how income is taxed.
Bonus: The best states for remote workers (tax-wise)
From a state income tax perspective, the most advantageous states for remote workers are those with no state income tax. Living in one of these states can significantly simplify tax obligations and potentially save thousands annually.
As of now, the nine states with no state income tax are:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington (although it now has a 7% to 9.9% tax rate on long-term capital gains exceeding a certain threshold)
- Wyoming
These states offer a more straightforward tax setup for remote workers, especially for those looking to minimize the complexity of cross-state work or multiple tax returns.
Understanding payroll tax responsibilities for employers
When businesses hire remote workers, they face additional administrative burden and must navigate complex payroll tax withholdings. Employers who employ remote workers across state lines need to understand that each state has its own rules regarding:
- Payroll tax obligations: Employers must withholding payroll taxes according to the employee’s resident state requirements. This includes federal unemployment tax and state unemployment taxes, which vary by jurisdiction.
- Registration requirements: Companies may need to register with unemployment agencies in each state where they have remote employees, even if they don’t have a physical location there.
- Tax withholding compliance: Employers must ensure proper tax withholding for both federal and state obligations, following each state’s tax laws and local tax requirements.
Managing remote work taxes: best practices for employers and employees
Having all this information, we can now move on to the best practices. What can you do as a remote worker or an employer to manage these taxes successfully?
For employees:
Know your classification (W-2 vs. 1099)
Your tax responsibilities differ significantly. W-2 employees should verify correct withholdings on their paystubs, while 1099 contractors must manage their own taxes and set aside funds for self-employment taxes (Social Security and Medicare).
Get familiar with local laws
State and local laws vary widely regarding employee rights and employer obligations. For example, a remote employee in Los Angeles might be entitled to business expense reimbursements not required in Nebraska.
Report location changes
Moving across state lines affects tax and labor obligations. Always inform your employer when your work location changes to prevent tax errors.
Consider consulting a tax professional
Given the complexity of remote work tax implications, especially when working across state lines, seeking tax advice from a qualified professional can help ensure compliance and optimize your tax situation.
Learn how to invoice as a contractor: tips, mistakes to avoid, and tools to save time.
For employers:
Register in each applicable state
If you have remote W-2 employees in states where your business lacks a physical presence, you may still need to register with local tax and labor authorities. For example, a Texas-based company with a remote employee in Oregon may need to register and comply with Oregon’s employment laws.
Understand payroll tax responsibilities
Accurately filing forms like IRS Form 941 is essential. If you don’t have a dedicated payroll specialist, consider investing in training or hiring expert assistance to avoid mistakes.
Use an employer of record (EOR) for international hires
Directly hiring workers in other countries can be legally complex. An EOR acts as the legal employer, handling compliance, payroll, and benefits. For instance, a U.S. company hiring a developer in Germany can partner with an EOR to manage these aspects legally and efficiently.
Useme an intermediary platform for flexible outsourcing
Instead of hiring remote employees directly and put up with taxation rules, you can engage independent contractors through Useme.
When to seek legal advice
The complexity of remote work tax regulations means that many situations require professional guidance. Consider consulting a tax professional when:
- You work across multiple states with different tax codes
- Your employer is based in a state that applies convenience rules
- You’re unsure about your tax liabilities as a remote worker
- You need help understanding reciprocity agreements between states
- You’re dealing with international tax implications
During tax season, having proper documentation and understanding your obligations can save significant time and prevent costly mistakes.
Conclusion on remote work taxes
Remote work offers unparalleled freedom and flexibility but comes with distinct tax responsibilities. Whether you’re a contractor, employee, or employer, a clear understanding of your obligations across states or international borders is vital for compliance and avoiding costly surprises.
The key takeaway for anyone asking “if I work remotely where do I pay taxes” is that the answer depends on your classification, your state of residence, your employer’s location, and the specific tax regulations that apply to your situation. How remote workers are taxed varies significantly based on these factors, and staying informed about tax laws in your jurisdiction is essential.
To make remote work easier, safer, and more efficient – wherever you are – consider using platforms like Useme to streamline contracts, payments, and professional collaborations.
