More people are engaging in remote contract work than ever before. Remote contract work offers almost as many advantages to workers and companies as full-time employment. However, this sea change from traditional in-house work to remote contract positions not only alters the way work is done, but also affects both the tax obligations and opportunities for workers. The tax implications of remote contract work are complex, so the advice of a CPA is strongly recommended. In general, however, here is a broad outline of those implications.
What is the Tax Status of Remote Contract Workers?
Remote contract workers are not considered employees, according to the IRS. In many cases, their tax status is “independent contractor.” As an independent contractor, there are certain tax obligations that the worker shoulders themselves. This includes paying both income tax and self-employment tax, which covers Social Security and Medicare contributions.
How Does the IRS Define Independent Contractor?
The IRS carefully outlines the definition of an independent contractor in the tax law. The status is mainly defined by the level of control the company has over the worker in terms of behavioral control, financial control and the type of relationship between the parties.
Behavioral control refers to whether the company directs or controls how the worker does the task(s). Included in this is the degree of instruction, evaluation systems and training.
Financial control references whether the business has a right to control the economic aspects of the worker's job. It includes factors like the extent of the worker's investment, the degree to which the worker can realize a profit or incur a loss, and how the worker is paid.
Type of relationship includes things such as written contracts, provided benefits, permanency, and extent of services in relation to being a key aspect of the business of the company.
You can find the IRS definition of an independent contractor here. The reason it’s important to know if you are an independent contractor is because it directly impacts how you pay taxes and how much taxes you’ll pay. Consult with your CPA for details.
Tax Implications of Remote Contract Work
The many tax implications of remote contract work include the following:
Making Estimated Tax Payments
One of the key responsibilities of an independent contractor is making estimated tax payments on a quarterly basis. Since taxes aren’t withheld from their income, remote contract workers need to calculate and pay estimated taxes to the IRS four times a year. These payments cover income tax and self-employment tax and are due in April, June, September and January of the following year.
Failing to make these payments, or underestimating the amount due, can lead to penalties and interest charges. It's crucial for remote contract workers to keep accurate and detailed records of their income and expenses to make precise calculations. This is why many remote contract workers rely on a CPA to calculate and submit their quarterly tax payments.
Home Office Deductions
Many remote contract workers operate from a home office. The IRS offers a home office deduction that can be valuable for such workers. To qualify, the space must be exclusively and regularly used for business purposes. This deduction allows for certain expenses related to the home office to be deducted, such as a portion of rent or mortgage interest, utilities, and insurance.
There are two methods for calculating this deduction: the simplified option and the regular method. The simplified option offers a standard deduction based on the square footage of the home office, while the regular method involves more detailed accounting of actual expenses. Deciding which method to use depends on various factors, and a CPA can help determine the most beneficial option, depending upon your individual circumstances.
Deductible Expenses
In addition to the home office deduction, remote contract workers can deduct other business-related expenses. Maintaining detailed records of these expenses is crucial for accurate deduction claims. These may include, but are not limited to:
Equipment and supplies needed for work
Software subscriptions and online tools
Business-related travel and mileage
Professional development, such as courses or conferences
Health insurance premiums, if not eligible for a spouse’s plan
State and Local Tax Considerations
Tax obligations can vary significantly based on location. Remote contract workers need to be aware of the state and local tax laws that apply to them, especially if they work across state lines. This can complicate tax calculations and filings, making the advice of a CPA even more valuable.
Helpful Tips For Remote Contract Workers
Being a remote contract worker feels like freedom, but it can also feel very isolating. Here are some helpful tips as far as tax implications:
Keep all receipts - You may not be aware of all the tax deductions you’re entitled to. Keep all your receipts so that you can quickly reference the details of expenses in case your CPA finds something that you can or cannot deduct. Most people find that simply taking a picture with their phone or scanning receipts into a folder works better than having a drawer full of paper receipts.
Save for tax payments - Remember that all the money you receive from your client(s) isn’t yours; some of it belongs to the government. You could be in for a shock if you find that you don’t have enough left over to make your estimated tax payment. Consider putting a percentage of your income payments into a savings account, so you can be sure to have the money available come tax time.
Be diligent about saving for retirement - There are advantageous retirement savings plans you can still participate in as a remote worker. Your CPA might have some ideas. Just because you’re a contract worker doesn’t mean you have to have a lean retirement account.
As a remote contractor worker, you’re in a unique position as far as your taxes. Your CPA will be an invaluable resource as you navigate all the ins and outs of this role.
by Kate Supino