Digital nomads pay taxes too

Roughly 55 million Americans can currently work remotely on a full-time basis, according to a new McKinsey study. That means happier pets, overwatered houseplants and some pretty complicated tax implications for both employees and employers.

One way to solve this problem is by offering remote workers contract jobs. But the tech job market is still tight, especially for companies desperate for engineers, and talented workers expect full-time remote work, with benefits. Plus, contract work invites all kinds of additional tax issues for both companies and workers.

Tax time is still a good nine months away, but The Great Resignation combined with industry layoffs means a lot of folks are considering their next job right now. And according to tax experts, that is exactly the time to think about how and where you’ll pay taxes.

The dust is settling on the pandemic workplace chaos, so both companies and workers need to know and follow the law unless they want to commit tax fraud.

• According to a Harris Poll, over half of employees who started working remotely during the pandemic didn’t fully understand the tax implications.
• And for good reason: The laws differ from state to state; they change; and if you ask your HR person to help you fill out your tax forms, they’re likely to say that it’s out of their scope of responsibility and could make the form invalid.
• “The general rule of thumb is that the employee should pay taxes to the state in which they perform the work,” says Kevin Fritz, employment counsel at benefits software company Gusto. “But some states have different laws about this, and the employee could be double-taxed [home state and work state].”

The COVID loopholes are closing.

• In 2020, some states waived restrictions so people could travel outside of their work state to care for family or protect themselves.
• “I think the notion of the ‘Wild West’ of remote work has faded,” says David Livitt, global mobility services leader at Mazars, an international audit, tax and advisory firm. “I’d argue that it’s time for a review of the overall approach.”
• Fritz from Gusto agrees. “A lot of the COVID flexibility has ended now — and in most cases, if you relocated during COVID and are still in a new state, you're more than likely required to pay taxes to the new state now.”

How long can you stay in one place without paying taxes?

• “I’m certain that if you lined up 10 people and asked them this question, you’d get 10 different answers,” says Livitt.
• Some people will tell you the answer is 183 days, but Livitt says this is a myth.
• “It all sounds so idyllic … I fancy working in Canada for a month. Or I have a family visit to India for two weeks, maybe I can attach another 90 days there to work remotely for my U.S. employer?” Livitt’s advice is to “check the details.”

What are the biggest risks?

• If companies don’t comply with local tax rules, they could face penalties and fines. “And maybe worse consequences,” says Livitt.
• “Many individuals think that working in a different country or state for even a short period of time isn’t taxable — but it often is.”

“We’ve all seen the rise of “digital nomads” — and who wouldn’t want to work on or near a sunny beach for a year? However, there might be hidden issues with respect to taxes, social security and data security.”

— Meg Morrone, senior editor (email | twitter)