Being a remote worker is a dream for many. Not only can you avoid those sometimes hours-long commutes to the office but if you work at an async company, you’ll also be able to work on a schedule more suitable for you. However, if you’re lucky, you might work for a company that allows you to work remotely from anywhere in the world. If not, you may have considered freelancing in order to achieve that goal.
Whichever case your work situation may be, there is one question that lingers at the back of your mind: “Where do I pay taxes if I work remotely?”
Although we all dread the topic of taxes, every working adult in the world needs to face them in one way or another. As much as we loathe the idea of getting less money each month, taxes are used for making sure that the places we live in are able to maintain themselves and operate — regardless of where we are in the world. So, let’s talk about taxes!
In this guide, we’ll be going through everything you’ll need to know about remote work taxes. Whether you’re a remote worker or an employer of one, it’s important to ensure that you meet compliance with local labour and tax laws so that the business (and the work) can run smoothly. With that said, let’s take a look at the different situations regarding remote work taxes, especially within and outside the USA and the UK.
We’ll begin this guide with the most complicated situation — remote work taxes in the United States. As a whole, anyone residing and working in the US are beholden to two types of taxes: state and federal. Federal taxes are a lot more straightforward because everybody has to pay them. The location of where an employee does work, and not where the employer is based, dictates the federal tax rate. And what about state taxes? Well, they’re a lot more complicated.
If you work remotely but stay in the same state as the company that employs you, then life is a whole lot easier for both you and your employer. The process is near automatic and the employees are paid their net salary, after tax withholding. For most states, employers need to withhold income tax from their employee’s salary, although there are some states that do not levy an income tax. Federal income tax is filed on a yearly basis and the payment is determined according to the income tax bracket that you fall under — starting from 10% and up to 37%.
As of writing, there are nine US states where employees are free from income tax burdens: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
When you work remotely in a different state than your employer, your state income tax situation depends on where you’re a resident and where you do your work. If you reside in any of the “tax-free” states we’ve mentioned earlier, then you only need to worry about your yearly federal income tax. However, the situation changes if you prefer living the “nomad” life — travelling (and working) from state to state. This specific situation especially applies to contractors and freelancers who need to file their own taxes.
Depending on the state, remote workers who travel and work from different states might either find themselves protected by a reciprocity agreement between US states or they’ll need to file a nonresident state tax return. Ultimately, the physical location of the worker determines which taxes are applied to them. As an employer, it’s highly recommended that you engage with a PEO or an EOR company to ensure that you’re always compliant with local tax laws.
While you might believe that US taxes stop applying to you once you step outside the country’s borders, that’s unfortunately far from the truth. There are several situations here that you need to be aware of — being a US citizen, being a non-US citizen working for a US-based employer and having zero working relationship with the US. We’ll clear up the latter first.
If you’re a non-US citizen working from a non-US company, then US tax laws will stop applying to you as long as you’ve not lived in the US for 183 days within a given tax year. It really is as simple as that! However with that said, let’s take a look at the other two situations:
Unfortunately for all citizens of the US, you will be subject to federal income tax regardless of how long you’ve lived outside of the country. This means that if you’ve lived away for 5 years or 20 years it won’t make a difference — as a US citizen, you will always fall under the US tax jurisdiction. The Internal Revenue Service (IRS) dictates that all US citizens are taxable on their worldwide income, regardless of their place of residence.
The general rule of thumb is that when you live in a country for 183 days within a single year, you tend to automatically become a tax resident of that country and will then need to pay the taxes of the country that you reside in. But don’t despair! The US government has signed double taxation treaties with several countries which thankfully prevents US citizens living abroad from needing to pay federal income tax when earning up to $100,000 a year (subject to inflation).
If you’re a “non-resident alien” of the US (their words, not ours!) then typically you won’t be subject to US tax laws. However, there is one exception: if you work for a US-based company. Here, it becomes slightly more complex, especially for companies who want to manage a global workforce.
If you’re working for any US-based entity, whether as an employee, contractor or freelancer, the company that you work for should provide you with a W-8BEN form to fill up. Part of that form is a declaration of your country of residence — meaning where you currently reside and, preferably, where you are a tax resident. Depending on your country of residence, you may be subject to a withholding tax rate of up to 30%. But if you reside in a country with a double taxation agreement, you could be totally exempt from any tax withholding.
When it comes to the UK, things are definitely a bit more straightforward. If you live and work in the UK, then you’ll fall under the tax jurisdiction of the United Kingdom. However, there are slightly different situations depending on whether you’re an employee of a company or if you’re working as a contractor or freelancer. Let’s take a look at those two situations in more detail:
When you work for a company in the UK and reside in the UK, you will immediately start paying income taxes to the UK government with your first paycheque. The UK Revenues and Customs department (HMRC) has determined several tax brackets of up to 45% for incomes above £150,001 a year in England, Wales and Northern Ireland. Things change if you live in Scotland since they have full power over their income tax thresholds, so their higher income tax bracket instead sits at 46% for annual incomes above £150,001.
Much like in the US, the taxes you need to pay depends on where you do the work. For example, if you live in Scotland but work for a company in England, you’ll fall under Scottish tax jurisdiction when it comes to paying remote work taxes. The tax rate that your employer needs to withhold from your income is dependent on which nation you spend the most time in within any given tax year — or where you have a permanent residence. In the UK, the “tax year” generally starts on 6 April and will end on 5 April of the following year.
If you’re not employed by a company and instead work on a contract or freelance basis, then you have to organise your own remote work taxes as a “self-employed” person. As soon as you work as a contractor or freelancer in the UK, you have the legal obligation to inform the HMRC about your employment status by registering as self-employed through their online portal. Once you’ve registered and received confirmation from HMRC (usually via post, but you can check online), you then have to start filing a self-assessment tax return by 31 October the following year when filing by paper or earlier, by 31 January, when you file online. HMRC will automatically calculate the taxes owed by you each year once you submit your tax return.
There will be an occasion when you have to make biannual tax payments, called “payments on account”. This scheme was created by the UK government to help the self-employed spread their tax burden across two payments in order to cover the supposed tax payment for the current fiscal year. Payments on account deadlines will be 31 July and 31 January of any given tax year.
If that wasn’t confusing enough, to further add to it, the UK government has put into effect what is nicknamed “IR35” since the financial year starting April 2000. Basically, it was anti-tax avoidance legislation designed to tackle “disguised” employment and treat anyone who falls under that category as a full employee of a company within the eyes of the HMRC. “Disguised employment” relates to the practice of companies paying their workers through an intermediary in order to avoid withholding income tax and National Insurance payments. Employment was deemed “disguised” if the relationship between the worker and the company would be classed as employment if there wasn’t an intermediary.
As of April 2021, companies were given the ultimate responsibility of determining whether a worker was “inside” or “outside” IR35 and, therefore, who is ultimately responsible for paying income tax and National Insurance payments. The UK has very clear guidelines on determining employment status and deciding who is classed as “employee”, “worker”, or “self-employed”.
If this sounds extremely confusing, don’t worry, we absolutely understand. Tax and labour legislation not only changes all the time but is quite different when it comes from country to country. That’s why it’s so important to stay on top of laws to maintain compliance globally — especially when you’re self-employed or are an employer.
In this case, determining remote work taxes is a lot simpler when it comes to the UK than it is for the US. For one, UK citizens are not indefinitely bound by UK tax law in the same way that US citizens are. The next would be that if you work for a UK company but spend the majority of the tax year as a tax resident of another country, then the UK tax laws still don’t apply to you, regardless of whether you’re a UK citizen or not.
The only caveat is that all UK citizens who live and work outside the UK have to spend at least one tax year completely abroad to be considered a non-tax residents of the UK. After that period, according to HMRC, they can’t spend more than 90 days in total per tax period, with a maximum of 30 of those days working. If you work for more than 30 days in the UK, you’ll be automatically considered a tax resident again.
As soon as you know that you’ll be leaving the UK indefinitely, you need to inform HMRC by printing out form P85, filling it out and sending it via post, preferably before you leave. If you’ve already left the UK, you are allowed to fill out the P85 form online.
However, if you were deemed self-employed before leaving the UK and, therefore, the last form you had submitted was a Self-Assessment tax return, you won’t be allowed to use HMRC’s online services to change your tax residency status. Instead, complete the “Resident” section of form SA109 and send it to HMRC via post.
Whether you’re a US citizen, a UK citizen or a citizen of the world, there are ways that you may be able to save on taxes as a remote worker. Before we get into it, we should clarify that these are merely suggestions, and you should always ultimately get in touch with experts to stay compliant with local tax laws. What we outline here is meant to be an informational guide and should not be used as concrete advice.
With that said, here are some of the suggestions to limit your tax burdens as a remote worker:
Income tax regulations and standards vary greatly from one country, state, province, and municipality to the next. Seek out information about local rules before relocating and filing taxes in a new location. Working with a tax professional can be easier and less expensive than trying to figure things out on your own.
If you’re an employer looking to employ remote workers, seek out the advice of a third-party such as an EOR, to keep your company compliant.
Regardless of whether you’re a remote worker overseas or living within the same country as the company you work for, clarifying your employment relationship with the company is paramount. It’s important to never assume your employment status because the definition of different employment statuses can vary in different countries — with some countries not even having a legal definition of “contractor”.
Determine your legal employment classification as an independent contractor or employee by researching state and local legislation and inquiring with your employer to get it in writing. This goes both ways. Any time an employer learns that they have improperly classified an employee, they must take immediate action to rectify the situation or face legal consequences.
You might not realise that it’s actually really important to make sure that you’re a tax resident as a remote worker, regardless of your employment status. While it might be great to hop from country to country every few months, a lack of tax residency can prove to be problematic should you decide to return to your home country. But, if you’re determined to keep as much of your hard-earned money as possible, you should consider residing in a country with no income tax.
There are a few countries scattered around the world that do not burden their residents with income tax. Some of the most well-known are the United Arab Emirates (home of Abu Dhabi and Dubai), Monaco and the Cayman Islands. However, some of the lesser-known countries with zero income tax are Antigua and Barbuda, Brunei, the Bahamas and the Maldives. However, it’s important to note that you’ll need a legitimate residency visa in order to stay in all of those countries long-term.
Genuinely, the easiest way to rest easy as both the remote worker and the employer is to let the experts handle it. Contractors and workers that work abroad don't always have access to the resources they require, and a lot of them certainly don’t get the support they need to simply get the work done with zero fuss. Companies can help themselves and their workers to guarantee compliance with local labour and tax requirements by outsourcing payroll, benefits, taxes, and compliance to an EOR.
Working and hiring on a global scale is incredibly complicated, and taxes are only one factor. Visas, culture shock, and language obstacles are just some of the challenges remote workers face. Even so, businesses have to deal with payroll, benefits, and regulatory difficulties.
No matter where they call home, everyone has the right to work and live comfortably, all while working for an amazing global company. As a result, businesses should consider teaming up with a global outsourcing partner that has experience in making this kind of thing happen, both in terms of expanding the company's access to talent and facilitating the remote work of existing workers.