When you work remotely out-of-state or out-of-country, how are taxes handled?

When a client works remotely out-of-state or out-of-country, there are several key tax considerations they should keep in mind regarding their U.S. tax liabilities:

1. State Tax Considerations:

• State Residency Rules: Each state has its own rules for determining whether you are considered a resident for tax purposes. If you maintain a home or spend a significant amount of time in a state, you may still be considered a resident and subject to state income tax, even if working remotely in another state or country.
• State of Work vs. State of Residence: If you work in one state but live in another, you may be required to file a tax return in both states. Some states have reciprocity agreements to avoid double taxation, but this varies by location.
• Remote Work Nexus: Some states may tax you if your employer is located in the state, even if you are working remotely from another state.

2. International Tax Considerations:

• Foreign Earned Income Exclusion (FEIE): U.S. citizens working abroad may qualify to exclude up to a certain amount of their foreign-earned income from U.S. taxation. For 2024, the exclusion amount is $120,000. To qualify, you must meet either the physical presence test (330 full days in a foreign country during any 12-month period) or the bona fide residence test (establishing residency in a foreign country for an uninterrupted period that includes an entire tax year).
• Foreign Tax Credit (FTC): If you pay taxes to a foreign country, you may be able to claim a credit on your U.S. tax return to offset double taxation on the same income.
• Foreign Bank Account Reporting (FBAR): If you have a financial interest in or signature authority over foreign bank accounts with a total value of more than $10,000 at any time during the year, you must report these accounts annually to the IRS.

3. Self-Employment and Independent Contractors:

• Self-Employment Taxes: Even if you are living or working abroad, U.S. self-employed individuals are still required to pay self-employment taxes on their earnings (Social Security and Medicare).
• Treaties and Totalization Agreements: The U.S. has social security agreements with several countries that can prevent double taxation on social security and Medicare contributions. These agreements allow you to contribute to only one country’s social security system if you meet specific criteria.

4. Employer Compliance:

• Remote Work and Employer Tax Obligations: Some states and countries may require your employer to withhold local taxes or register as a business entity in the jurisdiction where you are physically working. This may affect your employer’s ability to handle taxes correctly, potentially resulting in you owing taxes in both locations.

5. Tax Filing Requirements:

• U.S. Worldwide Income Taxation: U.S. citizens and resident aliens are required to report and pay taxes on their worldwide income, regardless of where they live or work.
• Filing Deadlines: You may qualify for an automatic extension to file your U.S. tax return if you are living abroad, but interest on any unpaid taxes still accrues.

6. State and Local Tax Workarounds:

• Domicile vs. Statutory Residency: If a person maintains ties with a particular state (e.g., a home, driver’s license, voting registration), they may still be considered a resident and taxed on worldwide income by that state, regardless of where they physically work.

7. Impact of Remote Work Arrangements:

• Permanent Establishment (PE) Risks: In international cases, if you’re working from a country where your employer does not have a legal presence, you may trigger the creation of a “permanent establishment,” which can subject your employer to foreign corporate taxes.
• Compliance with Local Laws: Each country may have its own tax regulations regarding income earned while physically present there, even for short periods.

In such scenarios, it is critical to consult with a tax professional who understands both U.S. tax laws and the tax laws of the relevant state or foreign country.