The COVID-19 epidemic has significantly changed how people work, leading to a large number of people switching to remote work as freelancers. While there are benefits to working remotely, there may also be unintended tax consequences that are difficult to grasp. In this article, we’ll go over the tax-related responsibilities you should know and how to manage your federal taxes while working from home as an independent contractor.
Work-from-home taxes
Working remotely might make your taxes somewhat more challenging. This is due to the possibility that, in addition to your federal taxes, you will also have to pay state taxes in the state where your employer is based. Your connection to the state where your employer is based is referred to as your “nexus.” It is defined as such. If you have a relationship to a state, you must pay state taxes on the money you generate there.
To establish your nexus, you must consider the following:
Physical proximity
If you reside in one state and work remotely for a company with its headquarters in another, you may have nexus in both jurisdictions. This is because your firm employs you and have a physical presence in the state where you live.
Financial existence
If you don’t live in a state but make money there, you could have a nexus. This may occur if you sell your customer’s products there or provide them with services.
Fiscal Resident
Another consideration when discussing taxes for remote labor is tax residency. The term “tax residence” refers to the state in which you are deemed to live for tax purposes.
Depending on your tax domicile, the amount of state taxes you owe could change. Your IRS tax returns are typically filed in the state where you have a permanent address and expect to return after any brief absences.
Your tax residence may change if you are employed remotely and temporarily live in another state. Considerations include your daily routine, where you are registered to vote, and where you keep your driver’s license and car registration.
United States federal taxes
If you are determined to connect there, you must pay state taxes on any income made there. Every state has a separate set of tax laws, therefore, it is essential to familiarize yourself with those in the one where your firm has its headquarters. Certain states do not require residents to pay taxes in the state where they work because of reciprocal agreements. This applies to persons who reside in one state but work in another. Finding out if these agreements are legal in both your state and the state where your employer is based is essential because not all states have them.
Withholding Tax
While you work remotely, your company cannot deduct state taxes from your pay the same way they would if you worked in their office. As a result, you will be required to make estimated tax payments to the state where you have nexus. You must calculate your total yearly tax liability to make estimated tax payments, which you must then send to the state every quarter.
Prepare for taxes
You can take the following steps as a remote freelancer to ensure that you are meeting your tax obligations:
Find out where you are a tax resident with
Your tax residence may affect your tax obligations, as was previously mentioned. If you work remotely, it’s essential to determine your tax residence to ensure you pay taxes to the appropriate government agencies.
Maintain truthful records. Freelancers must keep accurate records of all profits and expenses linked to their businesses. By doing this, you will be able to accurately calculate your tax responsibilities and ensure you are using all your legal deductions.
Recognizing local and state tax laws
Each state has its own specific tax rules and regulations, so it’s important to understand the laws in each one where you do business. This might prevent unpleasant shocks when tax season rolls along.
Consider dealing with a tax specialist
If you are anxious about employment taxes, you may choose to see a tax professional. You may use a professional’s assistance to fulfill your tax obligations and comprehend the laws and regulations.
Working remotely may often offer several benefits, including flexibility and mobility. It’s essential to comprehend the tax repercussions of remote work and ensure that you fulfill your tax obligations to prevent any surprises during the 2023 tax season.
