With the rise of remote workers, understanding tax obligations has become increasingly important for both employees and employers. As individuals choose to live in locations different from where the companies they work for are based, they may encounter complex questions about where taxes should be paid. Navigating these complexities requires an understanding of factors such as tax domicile and state sourcing rules.

Tax Domicile

Understanding tax domicile is critical for remote workers, as it determines the primary jurisdiction where an individual is taxed. This is often referred to as tax residency and is based on factors such as the location of your primary residence, duration of your stay, where you are registered to vote, and where your vehicle is registered.

State Sourcing for Remote Income

State sourcing rules for remote income are generally tied to where the work is performed versus the employer’s location. For example, income earned by a taxpayer who works for a California based company but is a South Dakota resident performing their job duties from their Rapid City home, would be considered South Dakota source income, not California.

However, if that same taxpayer traveled to California and performed services for the company while in California, income earned during that time would be considered California source income. The taxpayer may then be required to file a California non-resident tax return to report those specific wages.

Employer Obligations

Hiring remote workers can also create challenges for employers. Employers must ensure proper withholding and reporting of payroll taxes for remote employees. Employers may need to register in multiple states and comply with varying state and local tax laws as their remote workforce grows.

Additionally, having employees in a state may create nexus and make it necessary for the employer to file an income tax return in that state. However, utilizing remote workers can also provide benefits to employers such as reduced overhead and access to a broader talent pool.

Home Office Deduction

A common question from remote workers is if home office expenses are deductible. Unfortunately, the Tax Cuts and Jobs Act of 2017 eliminated the ability for employees to deduct unreimbursed business expenses such as home office costs, supplies, mileage, and business meals. Home office expenses are still deductible for self-employed individuals.

This is just a brief overview of some of the tax implications surrounding remote workers. If you have questions about your specific individual or business tax situation, reach out to your KT Tax Advisor for more information.