How to Handle Tax Season When You Work Online
Author: Anthony Haage
- Your taxes can differ depending on whether you live and work in different states.
- Self-employment tax must be filed if you make more than $400 working remotely.
- Hiring an accountant or using a service can take the stress of tax season away.
While tax season might feel far away, it is especially important to start compiling your records and receipts well in advance, especially if you work remotely. This is even more important if you are a freelance worker.
There are many important things to consider before filing your taxes when you work online. Suppose you have recently switched to remote work. In that case, it is crucial to recognize the differences between filing taxes working for a company in person than working remotely and possibly self-employed.
By familiarizing yourself with the intricacies of filing taxes for remote work, you will ensure you are ready for this tax season and the next.
Your Taxes Could be Affected if You Live and Work in Different States
Doing your own taxes can already be a confusing and mind-numbing task for those of us not trained in the art. Taxes can become a whole other level of complexity when you work remotely in a state you don’t reside in.
If this applies to you, then you will be paying both income taxes for the state you live in as well as filing a nonresident tax form in the state where your company is incorporated. Already, you may be wondering if you’ll be subject to twice the taxation.
Luckily, you can credit the taxes paid in your non-resident state against your home state’s tax liability (or whichever way, depending on which state has higher taxes) to avoid paying double income tax.
The Supreme Court also set a precedent in 2015 to protect you from being taxed twice on your income. The 5-4 opinion, written by Justice Alito, held that states cannot tax non-residents’ income earned in the state without providing full credit for income earned outside the state.
Despite this legal precedent, filing your own taxes for remote work can be difficult to grasp. This is why it is so important to ensure you are aware of both state and local tax rules regarding where you live and where you work, especially if those places are different.
Furthermore, if you work remotely, you may also be interested in betting your earnings remotely as well. Stay online and consider the various payment options out there.
Don’t Forget to Pay the Self-Employment Tax
If you’re working remotely and are a freelancer, you have another step to take. You are required to file self-employment taxes if you make more than $400 from self-employment or you have church employee income of $108.28 or more.
The IRS defines self-employment tax as a mix of Social Security and Medicare taxes for people who work for themselves. This is what is taken out of the paycheck of most workers who do not work freelance. When working remotely, it is up to you to ensure these taxes get taken out of your income.
If you are a remote freelancer, you use the Schedule SE (Form 1040 or 1040-SR) to calculate your own self-employment taxes.
The self-employment tax rate consists of two different parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance). In total, this combined makes a self-employment tax rate of 15.3%.
You may also deduct the employer section of your self-employment tax when calculating your gross income.
Ultimately, taking the time to understand self-employment tax is essential for filing your own taxes when you are a remote-working freelancer.
See if You Qualify for Unique Tax Deductions
Depending on whether you work from home for a company or freelance, you may qualify for some tax deductions you wouldn’t if you commuted to the office every day.
One deduction is the home office deduction, which allows qualifying, remote taxpayers to deduct certain home office expenses when filing their taxes. To claim this deduction, you must have a portion of your home declared as the primary location of your business.
However, there are several other factors you have to consider in determining if you qualify, and these factors can lead to only limited deductible amounts. Employees may not claim home office expenses as a deductible, so you are safe if you are self-employed.
You may also qualify for a tax deductible when it comes to your internet and phone bill if used for your remote work. Be sure to look into every possible avenue for possible tax deductions you may qualify for because you work from home.
Consider Hiring a Tax Accountant or Using a Software
If the idea of filing your own taxes makes you want to run to a traditional office job, don’t open Indeed just yet. Just because you work remotely and are self-employed doesn’t mean you can’t hire a professional tax accountant to take care of your taxes for you.
Hiring a tax accountant will provide you with the peace of mind that your taxes are being filed correctly without the hassle of having to learn the local, state, and federal tax laws on your own. However, remember that tax accountants can be expensive, depending on your unique situation.
If you don’t want to hire a tax accountant but still want some guidance, using an online software might be the best way to file. When choosing an online tax software, it is important to consider your budget, how user-friendly the software is, the types of forms you can file through the software, and the option to chat with professional tax experts if you run into any trouble.
While plenty of individuals file their own taxes, the process can become even more complicated when you work remotely and are self-employed. Choosing to use a tax software or hiring an expert may be the easiest way to file, even if it is more costly.
Footnotes: