Remote Work Tax Implications 2025: 7 Essential Rules

The rise of digital nomadism—working remotely from multiple locations, often internationally—presents additional tax complexities. U.S. citizens working abroad remain liable for federal taxes, state taxes, and even foreign taxes. They may also need to file to claim the Foreign Earned Income Exclusion how does remote work get taxed (FEIE) and/or Foreign Tax Credit (FTC) to avoid double taxation on income earned overseas.

You should speak with the labor and unemployment agencies of each state your employees live and work in to ensure you follow all the proper tax procedures and withholdings. Allen came up with the original name of Micro-Soft, a portmanteau of microcomputer and software. Hyphenated in its early incarnations, on November 26, 1976, the company was registered under “Microsoft” name with the Secretary of State of New Mexico.

Workers in New Hampshire and Tennessee may be subject to state taxes on investments and other income, but these states don’t charge state taxes on wages.
Keeping a detailed record of days worked in different states or countries is essential for filing accurate tax returns.
By staying informed, keeping accurate records, and seeking professional guidance when necessary, you can optimize your tax situation and focus on what you do best—your work.
The Microsoft 365 Copilot app empowers your employees to do their best work with Copilot in the apps they use daily.

It is a key to establish a “tax home” to verify where to pay taxes and claim residence. For digital nomads, this is often where they maintain residence, keep belongings, or return to regularly. When they do not have a permanent home, they can choose a place where they spend most of their time.

Remote work tax implications 2025: State income tax, nexus, and multi‑state withholding

Try limiting the time you spend in other places or cutting ties that can indicate closer connections elsewhere. Some digital nomads have residency in tax-friendly countries to legally lower their tax burden. Making an informed decision with a clear insight into the rules is the key.

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Failing to meet these local requirements may result in penalties or legal repercussions, so comprehensive compliance is crucial.
For remote workers, understanding the distinction between federal and state tax obligations helps navigate the different rules for tax residency and income reporting.
Remote workers may need to file non-resident state tax returns if they work in a different state than their employer, and, in some cases, even if they only occasionally work from a different location.
Registering for tax withholding in the employee’s state can prevent legal issues and fulfill payroll tax obligations accurately.

In this guide, we’ll explain how taxes work if you work remotely and show you how to increase your tax refund. Estimated taxes are quarterly payments made to the IRS based on your expected income. Remote workers must file their taxes annually, but the requirements can vary based on income level and filing status. The IRS provides guidelines on who needs to file, which generally includes anyone earning above a certain threshold.

Track Days Worked in Each Location

The doctrine allocates income to the employer’s state when an employee works outside the office for personal convenience rather than employer necessity. Some states apply this rule to source wages to the employer’s state, affecting withholding and resident filing obligations. Employers should adopt clear location and telecommuting policies to reduce disputes. Under this rule, if an employee lives in one state but works remotely for an employer based in another state, they are only subject to taxes in the state where they live. For remote workers in the US, physical location remains the determining factor for which taxes workers pay. Workers in New Hampshire and Tennessee may be subject to state taxes on investments and other income, but these states don’t charge state taxes on wages.

The Senate added a change to House Bill 186 that would save homeowners money and require landlords to pay more. Lawmakers did this by tweaking Ohio’s property tax rollbacks, which reduce the taxes due on certain levies. Navigating taxes as a remote worker requires careful planning, but with the right knowledge, you can avoid pitfalls and optimize your tax situation while enjoying the freedom of location independence. Many countries require self-employed individuals to pay estimated taxes throughout the year. In the U.S., for example, freelancers must make quarterly estimated tax payments to avoid penalties.

If you qualify as a bona fide resident of a foreign country, you may be eligible to exclude a portion of your foreign-earned income from U.S. taxation. For remote workers, the home office deduction is one of the most beneficial. To qualify, you must use a portion of your home exclusively for business purposes. Remote workers, often classified as independent contractors or employees, must navigate a unique set of tax obligations. The nature of their employment significantly influences their tax responsibilities.

What are the primary state income considerations for employers with remote employees?

The announcement came a day after hosting a Sting concert for 50 people, including Microsoft executives, in Davos, Switzerland. Microsoft also announced a new multi-year, multi-billion dollar investment deal with OpenAI. In October 2021, Microsoft announced that it began rolling out end-to-end encryption (E2EE) support for Microsoft Teams calls in order to secure business communication while using video conferencing software. Users can ensure that their calls are encrypted and can utilize a security code that both parties on a call must verify on their respective ends. On October 7, Microsoft acquired Ally.io, a software service that measures companies’ progress against OKRs.

Following these guidelines can help ensure that you meet all your tax obligations as an employer and avoid any legal or financial penalties. A hassle-free way to ensure you’re compliant with remote worker tax implications is to use an international payroll processing guide. This may sound intimidating, but if you get your tax obligations sorted correctly from the start, compliance and filing become simple. People living outside the US who work as independent contractors must remember to save money for their own taxes. Employers generally don’t withhold any taxes from contractors or make payments to government entities on their behalf.

An employee must file a nonresident or part‑year return when they earn income sourced to a state where they are not a resident, or when they change residency during the year. Filing thresholds and credits for taxes paid to other states vary by jurisdiction. Employers generally must withhold income for the state where the staff member is physically located.

You typically owe taxes in both your state of residence and the state where you physically work. This means remote workers may face tax bills from states they did not expect. States such as New York, Connecticut, Delaware, and New Jersey apply the convenience rule. If you live in Pennsylvania but work remotely for a New York company, New York may still tax your income if your remote work is considered a personal choice . Under this rule, you may still owe taxes to your employer’s state even if you never go there. These states argue that you are working remotely for your own convenience, not because your employer requires it .

The IRS requires proper documentation, and good recordkeeping helps you get the deductions you’re entitled to. If you’re self-employed—which includes freelancing and some independent contracting—you may qualify for home office deductions that W-2 employees don’t. To write off home office expenses, you must use your workspace exclusively and regularly for business. The Tax Cuts and Jobs Act (TCJA) of 2017 changed the rules, limiting deductions for W-2 employees while keeping tax breaks for self-employed workers. That means not everyone can write off their internet bill or home office setup.

Remote work taxes outside the United States

Estimated tax payments are typically due on the 15th of April, June, September, and January. You can make payments electronically through the IRS website or by mailing a check. Regardless of your classification, obtaining a Tax Identification Number (TIN) is crucial.

Here are a few things you can do to keep your tax obligations at a minimum while working remotely. Geographic location is one of the critical factors that determine a remote worker’s tax liability. Hence, being familiar with state and local tax laws can help you spend less on taxes. It’s also worth adding that independent contractors must pay taxes by themselves because companies usually don’t withhold taxes for them. Remote workers who don’t live in the state where they work don’t have to file taxes in both states if they work from home.

It’s worthwhile to calculate both methods to determine which will offer you the greater deduction. Remote work can come with a variety of business expenses that may be deductible. While the rules seem complicated at first, the key is to understand where you live versus where you work. As a last resort, take extra steps to establish residency in a single country.

Unlike full- and part-time employees, self-employed and contract workers in New Hampshire may be subject to state taxes on their income in certain situations. In certain cases, a reciprocity agreement may protect remote workers from withholding taxes in their work state (where their employer is located) if they live in a different state. A person who lives and works remotely in Washington, for example, can perform work for a company that’s based in California without having to pay California state taxes. In telecommuting, the employee works from home or another remote location instead of going into the office.