if you work remotely, where do you pay taxes?

During COVID-19, many people were introduced to remote work. This away-from-office work style was necessary to limit exposure but continued to stick around as work-from-home participants saw the benefits.

However, there's a tricky side to remote work: taxes.

You might be asking, "If I work remotely, where do I pay taxes?" To help you answer this question, we've created a guide about how remote work functions for the many types of remote workers.

The short answer to this question is the following:

Taxing remote workers differs based on how exactly you work remotely.

How taxes are paid for digital nomads

Digital nomads are those that travel outside of their country of citizenship and work in a new country. Because of this, they qualify for some unique tax situations.

Many digital nomads take advantage of special tax-free exemptions, as there are some countries where they can pay no (or reduced) taxes. For example, Costa Rica offers a digital nomad visa that exempts you from many tax requirements. However, without a special visa, you might need to pay double the taxes.

Regardless, digital nomads from the United States must continue paying taxes to their home country. This situation also applies to other countries like France and the United Kingdom. When taxing remote workers in these countries, this double taxation can make it challenging to move.

As of the start of 2023, there are more than 40 countries where you can apply for a digital nomad visa. The most recent countries include Malaysia, Ecuador, Namibia, and Portugal, but the list is constantly changing.

Taxes for digital nomads also change depending on how long you stay in these countries. Those who spend most of their residency in their home country will usually pay taxes. However, you might qualify for some tax exemptions if you spend more of your time out of the country.

How taxes are paid for full-time remote workers

Full-time remote workers can see vast differences in their taxation status based on their worker status. For example, taxes change depending on whether you are a standard or contract worker.

Standard workers include regular full-time staff of the employer, such as those working in full-time remote tech jobs. They receive tax forms and benefits related to the country's local benefits requirements. For example, standard employees in the U.S. receive a W-2, indicating their tax status. The W-2 determines the state tax withholding for remote employees (and everyone else).

Independent contractors are those paid outside of regular staff requirements. Because of this, they don't qualify for benefits. However, these employees need to handle taxes themselves, meaning they will need to make payments to the areas where they operate.

To reduce this tax liability, contractors can apply their business expenses to their income. For example, if you need a new chair for your home office, you take that out of your earned income. As a result, it reduces your taxable income.

Some locations require independent contractors to pay extra taxes. For example, U.S. contractors must pay self-employment taxes, typically taken care of by the business you work for.

If you travel often, check out our article on how to work remotely and travel.

How taxes are paid for hybrid remote workers

Hybrid workers fit into many of the same categories as full-time remote employees. They might stay home once or twice a week but go to the office for the remaining three days.

Because of this, hybrid workers have fewer opportunities to apply for tax exemptions. For example, U.S. employees who perform full-time remote work might have a dedicated space for this, which often qualifies for a home office deduction, reducing the amount you need to pay on taxes. However, hybrid workers are less likely to have this dedicated space, meaning they can't claim deductions based on workspaces that aren't permanently for work.

Hybrid workers are also less likely to worry about taxes between states or regions. In our next section, we will discuss how remote workers in the United States address tax challenges between states.

From a federal standpoint, the United States tax system is relatively straightforward. However, if you are a remote worker who operates in multiple states, things can get tricky.

Because each state has its own tax rules, knowing the differences between these states is vital. Below, we will go through a few of the more common issues related to taxes between states.

How do you pay taxes if your employer operates out of another state?

If your employer operates out of another state, you typically won't have to pay two sets of remote work taxes. Often, employee-based income taxes are based on the state where you generate income, not where the revenue itself is generated.

However, some states will double-bill you for taxes. Here's a list of states to look out for:

• Nebraska
• New York
• Delaware
• Connecticut
• Pennsylvania

You can exempt yourself from this double taxation with the convenience rule. This rule indicates that you might not have to pay twice as long as your employer requests you to work in this remote location for the company's convenience.

How a reciprocal agreement simplifies state taxes

A reciprocal agreement exists between two states to simplify tax-gathering rules between them. Under these conditions, you would not need to file non-resident state tax returns, meaning you only need to pay in one state.

As of 2023, there are 17 states with reciprocal agreements. These agreements are often based on shared state borders and include the following:

• Arizona
• Indiana
• Iowa
• Illinois
• Kentucky
• Maryland
• Michigan
• Minnesota
• Montana
• New Jersey
• North Dakota
• Ohio
• Pennsylvania
• Virginia
• West Virginia
• Wisconsin
• The District of Columbia (DC)

Search the two states and "reciprocity rule" to determine whether they work together. If your two states aren't on this list, you'll be required to pay taxes for both.

Non-residents vs. residents regarding state taxes

State taxes bill residents and non-residents differently. Here's a breakdown of how the two differ:

• Non-residents are billed based on the income they performed in the state and from sources of income received from those that reside in the state.
• Residents are billed based on all income received while living in the state.

For example, if you live in Rhode Island as a permanent resident, you'll have to pay taxes on all income, but if your employer is based in Nebraska, you'll also have to pay income taxes from that state. However, if you also have a side hustle where you make money while residing in Rhode Island, you don't have to pay taxes on that particular income to Nebraska because you didn't make that money there.

If you reside in multiple states and have a home in each of them, the place where you spend most of your time is often your domicile state (where you live). For example, if you spend 183 days in one state and 182 in another, you'll be billed for the former, as it’s technically where you spend most of your time living.

Some states don't require any personal income tax, meaning you don't need to pay there. However, you often still have to file taxes for any income earned there.

Given that remote work taxes can get tricky, there are some common pitfalls you can avoid. Below are some tips to keep in mind to ensure that you remain compliant with your taxes.

• Perform additional research on local tax laws. Federal/national laws are generally simple compared to local laws. Always do some extra research on those local requirements to ensure that you’re paying your taxes correctly. You might find exemptions you didn't know you qualified for otherwise.
• Consider an EOR as a digital nomad or overseas work. Being an employee of record (EOR) puts the legal requirements of meeting local tax needs on the country. While researching what you need to do can help, taking off liability requirements can keep you on the good side of a country's tax laws.
• Know your tax classification. Not all full-time employees get benefits, but not all employees that work full-time hours are considered full-time employees. Clarify your tax classification with your employer to be sure you pay things correctly.

You can clear up a lot of the potential confusion by discussing things with your employer's human resources department (or someone knowledgeable on tax laws). You don't have to know everything about taxes; you only need to know your unique situation.

Remote work is an excellent way to get more time with your family or avoid long commutes. For digital nomads who work overseas, you can also use remote work as an opportunity to travel and expand your horizons. You can have fantastic experiences as a remote worker; just know your taxes or have your employer sort it out for you.

This guide works as a good starting point for remote work taxes. However, as you might imagine, you'll need to do more research. If we put everything here, this would be a thick textbook of tax terminology (which might not be as helpful).

By simplifying things, we hope to make the topic of taxes a bit less overwhelming. Here at EPAM Anywhere, we offer full-time remote-forever jobs in tech in more than 20 countries and happily do all the related paperwork, including tax-related requirements, to make sure our people can focus on what’s actually important — enjoying their rewarding careers built around their lifestyle.

Start by browsing our open jobs and feel free to apply to experience it for yourself.