Telecommuting has become the next normal and it has opened the gates for employment opportunities all over the world. As a matter of fact, 74% of CFOs and finance leaders in a Gartner survey have expressed their intentions to move 5% of their once on-site employees to permanently remote status after the COVID-19 pandemic.
And with these new sources of livelihood come the complicated issue of where the babies of the gig economy should pay their darn taxes. To straighten things out, below are the issues you need to be aware of to avoid any unwanted tax entanglements of the legal kind.
Location is Key
Your taxes can be instantly affected by your new location. Take for example the imperfect set-up of the U.S. There are some states that would charge you faster than your cab from the airport the moment you set foot in another state. Such states are bound to make you file what we call a non-resident return which comes with withholding.
As long as you live in the state where you filed our taxes and work there, your taxes won’t be an issue.
Now, remember, your income taxes with respect to state taxes, depends on your employers location and your remote office. Such situations can give you the unwanted additional tax burdens nobody wants. And it would be absolutely unfortunate if you or your company resides in a state that is hungry for tax revenue because that would definitely guarantee an increase in your taxes.
The Presence of Nexus
Commonly heard in accounting communities, tax present or nexus basically determines how states would tax the companies and employees who work in them.
For companies, this is determined by three factors that include property, payroll, and sales. So let’s say your happily telecommuting employee who’s based on a different state would provide the presence of his employer there. The employee could then be subjected to withholding tax where they are working remotely. Probable non-resident income tax fillings can also be expected in this scenario.
Now, if you happen to live in a state within a multi-state agreement, you might be asked to pay less than the others. There are also some generous states that grant income tax credit to their residents who decided to work somewhere else.
Tax Awareness When Leaving for Another Country
Once you leave your country, your tax situation shall definitely change. U.S. citizens should file their tax return in the U.S. no matter where they work and live, regardless of the length of time they have stayed in their new country.
These taxes will be heavily affected by choosing to claim their credit for taxes they paid in the foreign country where they reside or simply exclude all foreign income from their U.S. taxes.
Choosing the former would soften the blow of double taxation by the U.S. and the foreign country concerned. On the other hand, one is allowed to exclude as much as $107,600 from the U.S. taxable income. This is for the 2020 tax year. A little pencil pushing would help you decide because you can’t do both.
Foreign Accounts and Additional Tax Reporting
Bear in mind that when you do decide to leave the country, you might end up being subjected to additional tax reporting. Anyone with any interest in at least one account, or even if you are just a signatory of that account that exceeds $10,000 at any given time in the year shall be required to file a report Foreign Bank and Financial Accounts with the Treasury Department’s Financial Crimes Enforcement Network. You may also be asked to submit Form 8398 to the IRS depending on where you reside as well as your assets holdings exceed its threshold.
Knowledge of State Filing Requirements is Power
State tax returns can also be the wildcards of your tax-payer persona. There are high-tax states like New York that can make you pay income taxes regardless if the federal government has identified you as a foreign resident.
This goes the same for owning a car or a house that is registered in your state. Some states may treat you as taxable simply because you have a bank account there or even just a library card. If you want to move abroad, it would be a good idea to establish your residence in a low or no-tax state.
So regardless of your destination, the said concerns shouldn’t be left untouched if you want to keep things above board and legal on your end.