Where and how do remote workers pay taxes?

Remote work offers employees the opportunity to work from a convenient location, avoid frustrating commutes, and have more flexibility in their schedules. It has benefits for employers, too, including better employee retention and lower overhead costs.

However, the rise of remote work and the freedom to work from anywhere is not without tax implications. Even within the U.S., since people can often work remotely from a different state, employer and employee tax obligations can sometimes be difficult to understand.

This guide will clear up some of the most common tax implications of working remotely from another state, an increasingly common arrangement.

How are remote workers taxed?

Each state has its own rules regarding taxes for employees who live or work inside its borders. The general rule is that employees owe state income taxes to the state where they live and work. If those two states are different, figuring out an employee’s tax obligation can get more complicated.

Though it isn’t the case for all remote workers, many employees are able to work from anywhere with a remote job. This means they may physically work in one state while maintaining a permanent residence in another or work from home for a company based in another state.

Taxes on remote work in the same state

Despite the fact that some remote employees can work from anywhere, many still choose to live and work from home in the same state as their employers. In this case, they will owe income taxes to the state where they work remotely, provided the state collects income tax.

The following states do require employees to withhold state income tax as of 2022:

Alaska
Florida
Nevada
New Hampshire
South Dakota
Tennessee
Texas
Washington
Wyoming

If a remote worker lives in one of these states, they don’t have to worry about paying personal income tax on their wages.

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Taxes on working remotely from another state

When a remote employee works from home in a different state from where the employing business is based, withholding of income taxes should be based on where the employee lives and works. State income tax reporting, in this case, is based on the remote employee’s state of residence, not the residency of the employer.

There are some exceptions, however. If a state applies “compliance of employer” rules. In this case, employers are obligated to pay state taxes in their state of residency, not that of the remote employee—unless the employer requires telecommuting. The current compliance of employer rules states are:

Arkansas
Connecticut
Delaware
Nebraska
New York
Pennsylvania

State taxes are also complicated when employees work remotely from a state other than the one where they reside. If they’re only temporarily working out of state, each state has its own rules for how long a nonresident can work there without owing income tax.

If, however, the remote employee simply completes their work in one state while maintaining a permanent residence in another, both the employer and the employee could face tax liabilities in both states. Unless the two states have a reciprocal agreement, both states in this scenario have the right to levy a state income tax.

Check whether a state has a reciprocal agreement with any other states and find the necessary forms to be sure that withholding taxes are being applied correctly.

Remote workers' taxes: Considerations for employers

Employers have a legal responsibility to withhold taxes for all W-2 employees, including their remote workers. U.S. companies with remote workers in foreign countries, for example, must withhold taxes on their employees’ behalf based on their countries of residence.

With remote workers based in the U.S., employers’ federal tax obligations are slightly more straightforward.

Income tax

Remote employees are solely responsible for their federal income tax, but employers must withhold these taxes from their earnings throughout the year just as they would for in-person employees.

Employers should calculate the federal income tax withholding for each remote employee based on their Form W-4 and the wages they earned over the given pay period.

Social Security and Medicare taxes

Federal Insurance Contribution Act (FICA) taxes fund Medicare and Social Security and are shared equally by employers and employees. Every pay period, employers must withhold 6.2% for Social Security taxes and 1.45% taxes for Medicare from each remote employee’s wages and pay the same amount themselves for 15.3% total.

Federal Unemployment Tax (FUTA)

Employers are responsible for paying federal unemployment tax (FUTA) on behalf of every worker, whether they work remotely or in person. The standard FUTA tax rate in 2022 is 6% on the first $7,000 of wages subject to FUTA.

Note that employers can generally receive a credit of 5.4% by filing Form 940, making the net FUTA tax rate 0.6%. The FUTA credit employers receive depends on how much they pay in state unemployment taxes.

If you are struggling with the compliance and payroll headaches of employing a global team, Oyster’s global employment platform can help. The platform simplifies employee management for distributed teams and ensures compliance, regardless of the state or country where your remote workers live.

How much does it cost to hire in different states?

With different taxes to pay in different states it stands to reason that the costs of hiring will also differ. Check out our guides to get an idea of how much it costs to hire in each of these states:

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.

Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.

Where and how do remote workers pay taxes?