With over 18.1 million of the American workforces working from home, remote work has continued to grow receiving acceptance from both big and small businesses as they dedicate specific roles for remote workers and convert some onsite workers to digital nomads for many reasons. This paradigm shift is not just in the US but in Europe, Asia, and other parts of the world digital nomadism has continued to thrive.
The transition from onsite to remote working hasn’t been without hiccups as there has been some confusion. One of the confusions that has occurred as workers move from the traditional work experience to the new experience is taxation.
Many remote workers have questions surrounding tax implementation as they work for US companies from the United States and from abroad. This article will provide information about the Tax implications of working remotely for a US company while living abroad and in the States.
Non-US citizens working remotely for a US company from abroad will not need to pay US taxes Regardless of their employment classification as either an employee or contractor. This is because their income is not considered US-sourced since they are earning it while physically located in another country. Instead, individuals will need to pay income taxes in their country of tax residence, which is typically determined to be wherever they reside for more than 183 days in a year based on the 183-day rule.
Contractors will be required to file self-assessment tax returns in their country of tax residence to report any foreign-earned income from the US company to the local tax authority. Employees will see their taxes withheld and filed by the US employer directly to their tax authority in their country of residence. It is also possible that digital nomads who qualify as residents in multiple locations due to traveling may need to file tax returns in multiple countries. Contractors living abroad should continue paying into social security contributions in their home country to maintain benefit eligibility such as pensions based on the laws of that country.
Both individuals and the company paying them can use Form W-8BEN to certify the worker’s tax residence is not in the US. This removes the requirement for the individual to file a US tax return with the IRS and the completed form is valid for three years. Proper documentation and compliance with tax regulations are important for both parties to avoid any penalties.
Other Tax implications to note
Tax Obligations for Resident Aliens: All resident aliens are required to file US tax returns reporting worldwide income and pay US taxes, just like citizens.
Filing Requirements: Resident aliens and citizens both must file if income exceeds thresholds, reporting income from all sources.
Tax Treaties: Tax treaties may provide benefits but do not exempt residents from filing US returns.
Tax as a Remote Worker in the US: Remote workers, residents, and citizens alike face the same tax rules and must report all income.
State Taxes: Remote workers may owe taxes to the state where they reside and the state the company they work for operates from.
Self-Employment Taxes: Independent contractors face self-employment taxes in addition to normal income taxes.