Remote work state taxes: Paying across borders

Remote work is on the rise as organizations double down on flexible work models. By giving employees more autonomy over where, how, and when they work, businesses are seeing clear benefits—from improved work-life balance to reduced job stress among employees. 

This trend is only expected to grow. The World Economic Forum predicts a 25% jump in the number of remote jobs by 2030, bringing the total to 90 million. 

But offering more flexible, work-from-home or work-from-anywhere arrangements comes with unique complexities. Payment and taxation for remote workers can involve different considerations than those for on-site employees, creating a learning curve for the People Ops department.

They must adjust compensation and benefits to match the needs of employees working remotely while understanding how to pay and tax workers across different states and countries. 

Explore how remote work taxes and deductions work, alongside how employers can simplify the process by teaming up with a global employment expert.

Taxation for remote workers: Where do they pay taxes?

In the US, remote workers—both employees and independent contractors—pay federal taxes and, if applicable, state taxes based on where they reside and work. 

Sometimes the employer’s state follows the convenience of the employer (COE) rule, which taxes workers if they work out of state by choice rather than necessity. In such cases, the remote employee working from another state may have to pay taxes in both states.

There are some additional nuances to consider for people with unique living situations. For example, a worker who splits their time across multiple states may owe taxes to all of them. These workers can avoid paying taxes twice by using “reciprocity agreements”—tax agreements between states that prevent double taxation—or claiming a tax credit for amounts paid to another state.

Remote workers who’re residents of both the US and another country also have a complex tax situation. The IRS requires worldwide income reporting, which means that employees and independent contractors often have to pay local taxes in addition to US ones. For example, if a remote worker is a resident of both the US and Mexico, they’ll have to pay federal tax to both the IRS and to Mexico’s local tax authority. 

Some dual residents are eligible for foreign earned income exclusions and foreign tax credits, if the countries have a treaty in place and the worker spends over 330 days of the year living abroad. 

What are employers’ tax responsibilities for remote workers?

As a US employer of remote workers, you must understand your tax responsibilities to avoid incorrect reporting and withholding. 

Here’s what you need to do to prevent issues with the IRS for both you and your workforce.

Correctly classify workers

For US-based remote workers, employers must follow different tax rules based on whether the worker is an employee or an independent contractor. Correctly classifying the worker is the first, essential step in determining their tax situation. 

Here’s how the two differ:

• Contractors: These are independent workers who’re responsible for filing their own taxes and receive Form 1099 at the end of the fiscal year. Employers don’t have to withhold taxes from remote contractors’ paychecks, but must gather completed Form 1099 to report accurate contractor payments to the IRS.
• Employees: These are part-time or full-time workers under an employment contract and receive Form W-2. Employers are responsible for withholding state, federal, and payroll taxes from employees’ paychecks.

Gather the correct forms

During onboarding, employers must collect Form W-4 from employees and Form W-9 from contractors. Both forms provide the employer with a worker’s basic tax information, like the address the IRS has on file for the worker and a Social Security number. 

For remote employees, because the employer is responsible for withholding relevant taxes from paychecks, Form W-4 tells the employer how much federal and state income tax to withhold in line with the worker’s tax bracket (also known as the percentage table).

Apply and report income and payroll taxes

For remote employees (not contractors), employers must withhold the correct amount of federal and state tax from the worker’s paycheck and deposit it electronically to the IRS. The employer also needs to make quarterly reports to the IRS detailing the wages dispersed and taxes withheld for each employee.

Employers withhold payroll taxes from each remote employee’s paycheck, like they would any other employee. Payroll taxes include Medicare tax, unemployment benefits or FUTA taxes, and Social Security—sometimes called Old-Age, Survivors, and Disability Insurance tax (OASDI). 

In addition to withholding taxes, companies must submit Form 940 to the IRS, providing correct FUTA withholding.

Follow local employment laws

Employers of remote workers must stay compliant with local employment laws—not just in their geographical location, but anywhere they recruit. 

If you’re a US employer recruiting remote workers abroad, make sure you follow the employment, tax and regulatory rules of the countries where your workers live. For example, US companies recruiting remote employees residing in Canada must offer the mandatory benefits due in Canada and report the application of those benefits to the local authorities.

Companies hiring outside of their home country have to learn how to manage benefits in a foreign, unfamiliar system, all while staying compliant, which is challenging. Working with an Employer of Record (EOR)—like Oyster—takes the headache out of the process, as the EOR handles benefits and tax administration on the employer's behalf.

How employers help employees avoid unnecessary double taxation

Employees with multiple states of residence—or those who earn in one state but live in another—are sometimes at risk of double taxation. But employers can help workers avoid this.

If you manage a remote workforce, here’s what you need to know to prevent erroneous duplicate payments.

Tax credits

All states imposing income tax also offer a credit for taxes paid in another state on the same income. When remote workers have income taxed in two states, they can typically claim this credit. Each state uses its own formula for tax calculation, so you need to review relevant state rules when determining the credit amount.

Reciprocity agreements

Some states offer reciprocity agreements or commuter exemptions so people who live in one state and work in another don’t get taxed twice. Employers must research whether their state (and the states they recruit in) have these agreements and how the reciprocity works to correctly guide employees on how much tax they owe in each state.

Convenience of the employer rules

Some states, like New York, have convenience of the employer (COE) rules. If the employer’s state has this rule and the employee lives and works in another state, the employee may be taxed in both states. 

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Consider an employee working remotely for an NY employer. The employee must pay NY tax for the days they choose to work from home. NY will exempt tax for days when the company requires them to work remotely. Plus, the employee must pay regular income tax in their home state and may be able to claim a credit there for taxes paid to NY.

Clear recordkeeping

Employers should keep clear records of where employees live and work so there’s trouble when reporting to the IRS. 

Remote work tax deductions

Remote workers in the US have unique tax deduction opportunities, limiting their tax burden by lowering their taxable income.

Work-from-home contractors and freelancers can also deduct “business expenses” from their tax return, since they technically finance their office—even if it’s their kitchen table—and professional equipment. While contractors should do their own research or work with an accountant to determine their exact deductions, employers can guide them by knowing the basics. 

Here are some deductions that contractors qualify for.

• Home office expenses: Remote contractors can deduct the rent for the percentage of their home area they use as workspace. For example, suppose someone pays $4,000 per month in rent on a 1,000-square-foot apartment. Each square foot of that apartment works out to about $4 in rent. If the person’s home office accounts for 200 square-feet of the apartment, then they can claim a deduction of $800. The IRS also allows a simplified calculation method of $5 per square foot with an upper limit of $1,500.
• “Telecommuting” expenses: Work-from-home contractors can also deduct the portion of their internet and phone bill that corresponds to their professional needs. These are called “telecommuting” costs because, instead of physically commuting to a workplace, remote contractors arrive there virtually.
• Equipment and software: Spending on equipment—like computers, printers, and some office furniture—is tax deductible. The same applies to expenses for software that contractors need to do their work. For example, a remote worker could deduct subscription to a videoconferencing service or the license for a word processor.
• Business-related travel: The full amount of work-related taxis, flights, and hotels, and 50% of meal costs on the road are eligible deductions.
• Education: Independent contractors may deduct some education costs, like certificate programs related to their area of work.

Simplify global payroll and tax compliance with Oyster

Going remote may be the right move for your company. But switching from a traditional payroll system to one that must manage tax liabilities and benefits for a dispersed workforce can be confusing at first—not to mention, stressful.

Partner with Oyster to easily hire and manage employees in multiple jurisdictions. Oyster is a global employment expert that helps companies compliantly run payroll, meet tax implications, and offer employee benefits across the globe.

Explore Oyster’s EOR and global payroll services to see how employers use Oyster to quickly and correctly pay employees and contractors in over 180 countries.

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.