Mar 28, 2022
Factors like improved technology, the pandemic and incentives for remote workers to move to different areas are creating plenty of opportunities for people to work online and live wherever they want to. You can find a great quality of life by choosing an area that has characteristics you’re looking for in a place to live while having control over your career by not being dependent on local job opportunities.
It can be a freeing thought — and experience — to up and move to a new area, yet there are some important practical things to consider. One of them is remote work tax implications. As they say, “Nothing is certain but death and taxes,” so even if you escape your current state, those darn taxes will follow. But, don’t worry, it’s nothing you can’t handle, especially with the help of a tax professional. Here are a few things to keep in mind.
With some exceptions, you generally need to pay a state income tax. A complication of taxes for remote workers is thatincome tax varies from state to state. This can complicate matters when you live in one state while your work is based in another (or several others). Which state do you pay, and how does that affect you?
What simplifies the process is that income tax tends to connect to the state where you’re performing your work. This means that if your work headquarters is in one state but you’re living and carrying out the work remotely from another, you would most likely pay income tax to the state where you live and not the other.
State income tax is something to consider when deciding where to live. Some states, such as Texas and Florida, do not have a state income tax. In the states with this tax, some have higher taxes than others, so you might be able to save money by living in a lower income tax state.
However, different scenarios could play out:
Some states follow a “convenience rule” that favors the employer. These states, which include New York, Arkansas and others, require employees to pay income tax to the state where the employer headquarters is located. This situation makes things more complicated. In some cases, the state where you live and work may offer remote worker tax deductions or credits for those taxes you paid to another state. In other cases, this tax offset is not available, meaning you might be paying taxes to both states. Your employer may be able to help you avoid this problem by withholding taxes from the proper state or by assigning you to an office in a different state.
Sometimes, states have tax agreements with neighboring states while they may not with other states.
Some states have temporary remote worker rules due to the pandemic that may not last forever.
It’s important to know that the type of work you do can also impact your tax considerations. Take recent mover Joel Meine, for example. Even though he moved from a state with no income tax (Texas) to a state that does (Oklahoma), his job as a software developer allows him to earn a state tax credit. Coupled with an overall decreased cost of living in Tulsa, OK, Joel moved into a much more desirable situation.
“The overall tax impact is a lot less as well as the general cost of living,” says Joel. “Interestingly, although the state of Oklahoma has a state tax return but Texas doesn't, I still don't have to pay Oklahoma state taxes because as a software developer, I am able to earn the state tax credit for qualified software employees that substantially reduces my state income taxes.”
It’s important to know that the type of work you do can also impact your tax considerations. As a software developer, Joel Meine was able to earn the state tax credit for qualified software employees that substantially reduced his state income taxes.
Here are additional tax implications of working remotely from another state:
Sometimes, you only have to file in the state where you live. In other cases, you might have to go through the hassle of filing taxes in two states. One would be a resident tax filing and the other a nonresident return.
Another factor when filing taxes is how long you worked in a state during the year. As expected, this varies state by state. So, a state will generally only tax your income when you hit a certain number of work days, which could be one or could be 60, or may be based on the money earned.
In time, some of the problems ofworking remotely in another state may be resolved, as states are adapting to new working situations. There may even be a federal response at some point, as remote work is becoming more common and the tax situation between states is so complicated. In the meantime, it’s a good idea to look into the income tax rates and rules of the states where you’re thinking about living and working remotely. Consider questions like:
Does the state have an income tax?
What is the state income tax?
How does the income tax compare to your current state and other potential moves?
Is this is a convenience rule state?
Does this state offer tax deductions or credits if you pay income tax to your employer’s state?
Depending on the state where you’re living and working, your tax situation could become easier or more difficult for you. That’s why this is something worth considering. Talk to a tax professional about the situation to get the best and most accurate advice. Also, keep in mind that the situation could be different if you are not an employee but rather an independent contractor.
Before you up and move across the country, it’s best to discuss it with your employer first if you plan to stay at your current company. The reason is that your employer may be negatively impacted by remote worker situations.
First, if you have been temporarily working remotely, you’ll want to ensure that your employer is okay continuing that arrangement on a permanent basis. They may have it in their mind that you would return to the office or start a hybrid work model.
The other concern is that taxes may become complicated for the employer if you move. It’s possible that your company could end up needing to follow the tax guidelines of the state where you are living and working remotely. This is a business nexus that may affect your employer through:
State income taxes
Sales and use taxes
City or county taxes
Gross receipts taxes
They may also have to follow the labor laws in the state and local area where you have moved.
Also, keep in mind that these employer concerns could apply to you if you plan to run your own business with remote working situations.
There may be other ways remote work affects your taxes as well. You may be expecting to write off the expenses of a home office you use for your remote work. Federal taxes took away this home office tax deduction for those with an employer, while it is still offered for those who are self-employed. However, some states still offer a deduction for unreimbursed employee expenses. Nonetheless, this will only make a difference if your itemized deductions go beyond the standard deduction of the state.
When you’re considering features and benefits of certain areas where you could move, keep in mind how these working remotely tax implications could impact you. Rely on the help of a tax professional to navigate the complexities of a remote working situation.