Tax Law Issues Related to Working Remotely in a Different State COVID-19 Legal Center

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. As a PEO, we hire remote Canadian workers and lease them back to their employers, who manage their day to day. We  ensure that remote employees are issued T4s and T2200s and keep employees and contractors alike in compliance by managing expenses and employment contracts.

Employers should be aware of the convenience test to properly manage a remote workforce. OfficeRnD Hybrid is a hybrid work management solution that integrates with tax software like Quickbooks to simplify employee tax reporting. Due to the increased number of employees working from home, the introduction of the convenience rule made it easier for employers to manage a remote workforce. The rule arose as remote work gained popularity in recent years and hinges on the reason employees work remotely from home — either because it’s an employer requirement or because it’s easier for them.

Digital nomads’ taxes: the logistics behind

If you’re unsure how your state or local tax codes affect you, then it’s a good idea to work with a local tax professional to avoid overpaying or underpaying your taxes. Remote workers who live and work in different states need to pay extra attention to state and local taxes. Massachusetts has altered its tax scheme specifically in response to the pandemic. Massachusetts workers performing services outside Massachusetts due solely to the state of emergency are treated as though they remained in Massachusetts for tax purposes. Massachusetts will also award a tax credit for workers who started working in the state of Massachusetts as a result of the state of emergency, although they continue to incur tax obligations in another state. If you reside in one state and work in another state, and your employer’s worksite is in a third state, you may have to file as many as three tax returns.

remote work where to pay taxes

While your employer will tax according to the rules of their home province, you are required to pay provincial/territorial taxes where you reside. If there is a discrepancy between what your employer has remitted and what you owe, this will be reconciled with the Canadian Revenue Agency (CRA) when you file for taxes. In practice, this could mean either a bill or a refund depending on the tax rates of you and your employer’s home province. While legislators who passed the act couldn’t have known about the upcoming pandemic and the resulting change to workplace norms, remote employees are no longer able to claim this deduction.

The future of remote work taxes

Typically, you’ll pay taxes in the state you live in (unless that state doesn’t have income taxes). But if you work in a different state, then you’ll usually need to file a nonresident tax form in the state where you worked, listing how do taxes work for remote jobs the income and taxes you paid and earned in that state. If your W-2 lists a state other than your state of residence, you will file a non-resident tax return to that state as well as a residential tax return to your home state.

You should check with each state you have employees in to see what taxes you are responsible for. If you have employees who recently moved to a new state and worked remotely, they’ll need to establish a new domicile, or permanent residence, to avoid being taxed in their current and former states. Many states will audit former residents to determine if they are no longer a resident. The more evidence your employees have that they live in their new state, the harder it is for their previous state to claim them as a resident for tax purposes. As 1099 contractors aren’t employees, they must pay their taxes as an independent business to their state of residence (if working remotely). If your employer operates out of another state, you typically won’t have to pay two sets of remote work taxes.

About the author


Leave a Comment