Rock legend Gene Simmons recently KISSed California goodbye in a way that no remote worker should ever copy. “I’m done,” he told the New York Post in March. “There are earthquakes, fires and pandemics every year.”
How leaving California will spare Simmons from “pandemics” is unclear, but he has another motive. He also told the New York Post that California had become “uninhabitable” due to high taxes. Meanwhile, he listed his Beverly Hills estate for $22 million, raised the asking price to $25 million, and moved into a 12,000 square foot mansion on the Nevada side of Lake Tahoe.
I bet The Demon, supposedly worth $400 million, has a new fan base: tax auditors. Their job would be much easier if everyone were as subtle as Simmons. Auditors would know exactly which high net worth individuals are attempting to lower their tax bill by relocating and therefore who is ripe for a residency audit.
You might not be Gene Simmons, but if you worked remotely across state or country borders, or have relocated during the pandemic, you—and your employer—might be targeted by revenue-hungry auditors as well.
If you’re working remotely, these are the three biggest tax mistakes you can make.
Ignore state and city tax laws
My company, Topia, wanted to know how many people had worked from “anywhere” during COVID-19, so we asked 1,250 employees from the U.S. and UK about it in our annual Adapt survey. Twenty-eight percent of employees said they had worked outside their home state or country, but 40% had no idea there were tax implications that came with doing so.
What implications, you ask? If you have worked remotely in one or multiple U.S. states different from the one where your office is (or was) located, you may be on the hook for payroll and state income taxes in those places. If, for example, you make over $3,500 somewhere in California but still consider yourself a Chicago resident, you are expected to pay state income tax on the money you made in California.
The time and money thresholds for each state are different, so do your homework and paperwork. Either read up on the tax laws where you plan work or hire professional help. If you leave a high-tax jurisdiction like San Francisco for Boise, Idaho, you and your employer might have a lower tax burden—if you can document that you performed your work in Idaho. Otherwise, San Francisco and California will expect their taxes, and so might Idaho.
Work abroad illegally
Before the pandemic, digital nomads globe-trotted from place to place, taking pictures of themselves on beaches while they pretend-worked on laptops. In reality, many of them violated immigration rules while documenting the evidence for all to see. Most checked the “vacation” or “tourism” box on their passport control forms and never told the authorities they’d work during the trip. Otherwise, the host countries would expect taxes from the nomad and their employer (if they had one).
If you work for yourself and aren’t a multimillion rock star, the odds of getting into trouble for telecommuting while abroad are slim, as long as you don’t book a trip lasting longer than 30 days. If you have a multinational employer, however, the odds of trouble are higher. For your employer’s sake, check in with your HR team to determine what it will take to work legally at your destination.
Some countries have so-called “nomad visas” to accommodate remote workers. But whereas Germany’s nomad visa covers self-employed and freelance workers, it doesn’t cover employees of corporations. Your employer would be expected to pay taxes. And if your finance department gets a surprise letter from German authorities demanding payment, you may get fired for violating the terms of your employment contract.
Fail to report your locations to HR
Many companies don’t train employees to report their work locations to HR, even if they’re traveling for business. Thus, a majority of remote work is unknown to HR and finance, which means they can’t comply with tax withholding requirements.
In our Adapt survey, my team found that 93% of HR pros are confident they know where the majority of their employees are working, and 78% are confident their employees self-report when working in another state or country. In reality, just one-third of employees report all those days, and roughly a quarter report no days at all.
You might be reluctant to share your location. Some companies will down-adjust your salary to market rate if you move permanently from a high-cost city like New York to a more affordable one like Knoxville, Tennessee. Still, to avoid a situation where you get fired for breaking your employment contract and/or need a tax lawyer, report your location to HR. Tell them where you will be working and for how long.
Your company may have a legal entity in that state and be equipped to meet payroll withholdings and labor regulations. The concept of “asking for forgiveness rather than begging for permission” might fly with HR, but it won’t get either of you far with a tax auditor.
Don’t be a target
Don’t paint a bullseye on your back, like Gene Simmons. Don’t be a target for state tax auditors eager to generate revenue in a rough year. Don’t ruin your nomadic work vacation in France by getting deported or accidentally creating a French entity for your company. Play by the tax rules and enjoy your freedom.
Steve Black is the cofounder and chief strategy officer at Topia.