The pandemic has been motivating factor in some freelancers moving to avoid being in a hotspot for the virus or to be closer to family. While it can be advantageous to move in some regards, it may also affect your tax situation, so it’s important to know what is considered an actual move and how it may impact your local, county and state tax obligations.
For example, I have received a lot of calls from freelancers telling me that they moved out of New York City and therefore don't want to pay New York State or New York City taxes (New York City charges 2 to 3 percent income tax). My answer to them is simple: Just because you are living out of state for a few months doesn't mean you have moved—at least not in terms of state and local tax laws.
From a tax perspective, if you retain your residence in a particular state but live temporarily elsewhere, you are merely living out of state, it isn’t a move that absolves you from paying taxes in your primary geographic location. In fact, if you own a freelance business, it may actually open you up to having to pay tax in another location. Here’s an overview of how this might play out for you as a freelancer:
Speaking in broad, general terms, any location you temporarily relocate to work for a year or less is not considered a permanent location. A temporary work location is any place where you realistically expect to work (and do in fact work) less than one year. If you have a regular place of business outside of your home, then you can deduct the cost of commuting to a temporary work location.
Be aware of how working in another location—even temporarily—may affect the tax nexus of your freelance business. When businesses engage in economic activity in multiple states, such as when a freelancer works in one state and then moves temporarily to another to work, they are creating a tax nexus in those locations. The tax nexus determines which states, cities and counties have a right to tax the freelance business and the term apportionment refers to how much of the business’s net income those states can claim.
The tax nexus also determines whether a freelance or other business has sufficient presence in a locality, county or state to be obligated for taxes on any part of its revenue-generating activity. The apportionment determines the division of that income to ensure the appropriate
Become familiar with the tax rules related to each locality and state you do business in. Each local government and state determine the share of a company’s net income that is subject to income tax through an apportionment formula. Each state and locality are different but all use sales and may also factor in property and payroll located in its jurisdiction.
Sales tax may also factor into your obligations. If you sell products or offer services requiring you to collect sales tax (which is different in each jurisdiction), you may already be aware of the collection and reporting obligations required when you sell in different states. States impose sales tax both based on a physical and economic nexus. Each state has various rules.
Beware of your freelance tax implications if you have relocated during the pandemic. The pandemic has forced many people to change the way they live and work. If you have moved to work in a different city or a different state, it is imperative that you understand how this change of working location impacts your taxes. Do your research now so you do not have a surprise during tax time.
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
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