Similar tax issues can crop up in an international context and, again, the pandemic has highlighted their complexity. The process of managing specialist referrals is a costly, chronic challenge for your employer clients.
Those residency-related facts have to be disclosed on Schedule CA of the 540NR, which may pique the interest of an FTB examiner. But again, unless very large amounts of income are at stake, this is something best handled by a CPA.
Where do remote employees pay taxes?
If you’re living in California, you’re subject to California income tax on your earnings. If you work remotely, you may be wondering whether or not you have to pay California taxes on your income. Additionally, salaried employees have some protection under federal statutes. Under federal law, employers are not allowed to reduce salaried workers’ earnings due to partial workweek absences based on court appearances.
So, they too need to make sure duty days and other residency language appears in their employment contracts. And as a practical matter, it’s very rare for any remote worker not to have to make some visits to California to perform work while physically present in the state. The more time spend in state, the more tax is at issue, and the more pressing the need for dealing with duty days in the employment agreement.
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While some might say there was an existing trend toward remote work before the pandemic began, it has certainly received a boost in the past 18 months. The pandemic accelerated digitization for many businesses while providing employees with the flexibility to work from home. Employing contractors makes things a bit easier, but even if your company isn’t responsible for withholding taxes, there’s still some paperwork involved, for example issuing 1099 forms for your contractors. As with payroll, the main issue here is where your employees are located. Some companies choose to use platforms like Upwork to pay their employees, even if they don’t hire through them. In any case, choosing the structure of your relationship with remote workers should not be a matter of just picking the arrangement that is simply the easiest for both sides.
If they get hired through an EOR, companies will be able to guarantee accurate payrolling by complying with local tax guidelines and labor laws. Hence, your remote teams will get a better work experience through increased employee satisfaction and enhanced employee trust. However, withholding taxes for remote employees can be challenging as the amount varies across the federal, state, and local governments. For example, people who work temporarily from home due to illness/ accident are not remote employees. Similarly, remote employees working remotely due to the pandemic are not considered remote employees. In such cases, remote working tax implications do not apply to the employees.
What state law governs payroll taxes for remote workers?
Reciprocal agreements, or a compromise between states that allows nonresident workers to request tax exemption from the other state, exist in some places to prevent remote work taxes double taxation, but not every state has one. In these cases, the employee’s resident state may issue a tax credit for any income paid to your organization’s state.