Tax Consequences of Remote Working
During a time of transformation, technology and cultural norms often move faster than the supporting legal infrastructure. Several examples exist where the law is playing “catch up” to technology innovations. Take e-books, for example. Understanding what rights a buyer of an eBook has are blurred – sharing your purchase legally can be a difficult task versus lending a paperback to a friend. Similarly, the tax consequences for remote working can be confusing.
A remote worker that performs freelancing or services for clients operating in different countries faces a challenge when it is tax time. How should this activity be taxed? Are income taxes based on the location you physically reside, or where your employer is incorporated? How should double-taxation be avoided? Who is responsible for ensuring these calculations are performed correctly?
Taxation is a complex area that governments, companies, and individuals are struggling to address as workers become increasingly mobile. Tax consequences for remote working has simply not caught up to the reality of individuals participating in a globalized workforce.
Kavi Guppta prepared a Question and Answer discussion on this topic, which yields a few fascinating insights on how to best create a contingency plan. In his article from last November, he interviewed a representative from a Canadian CPA firm, who had these 5 tips to offer as advice.
- Keep Good Records – one of the challenges remote workers and freelancers face is record-keeping and transparency over their numbers. When working remotely, you can quite often be on the move, so it is can be difficult to keep track of and retain important documents and receipts. Regardless the taxing authority you submit a tax return to, retain these documents as proof of what expenses you incurred and what revenue was collected.
- Detail the Address Where You Live, and for How Long – quite often one of the criteria used to determine what income taxes are owed is based on what residency applies during that year. For example, if you choose to live in Nevada for 7 months of the year and California for the other 5 months, you might have a compelling case to avoid paying state income taxes, given most of your residency was spent living in a state without state income taxes. You should consult with an accountant to best understand what the specific tax codes might apply based on your living arrangements.
- Leverage Time Tracking Technology Whenever Possible – a wealth of information is now on the Internet. If you have specific tax questions, chances are someone else does too, so the answer to your question might already have been answered. Advanced time tracking and management programs can be used when preparing monthly invoices, to document actual time spent on a client’s behalf, as well as what activities were performed. These programs can not only provide more accurate visibility into how your time was spent, but can be a useful tool to identify and implement process improvement initiatives.
- Know what Jurisdiction Applies to your Tax Liability – remote workers and freelancers may work in several different locations on any given year. There may be some confusion surrounding which tax authority to submit and pay taxes to. Different state and foreign country tax authorities can have widely differing rules, as well as what constitutes a business expense. If you were required to re-locate as part of your job, it’s important to document your expenses, since they might be tax deductible.
- Leverage the Cloud for Data Storage and Application Hosting – working remotely can pose a challenge for keeping track of your documents. Cloud based productivity applications like G Suite are a great solution. Since all your documents are stored in the cloud you know that you always have access to the latest version no matter where you are.
Intent is an important attribute that separates tax avoidance with tax fraud. We all need to pay taxes – the amount should be tied to the output that was generated, less the cost incurred to produce that output. Over time, the tax consequences of remote working with be better substantiated with clearer legal guidelines and regulatory tax rulings that will achieve better consistency across states, and even countries. Meanwhile, the remote global workforce continues to expand its scope.