The coronavirus pandemic has been motivating factor for some freelancers who have moved to avoid being in a virus hotspot or to be closer to family. While it can be advantageous to move in some regards, it may also affect your tax situation. It’s important to know what is considered an official "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 2-3% income tax). My answer to them is simple: Just because you have been 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. That 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) for less than one year. If you have a regular place of business outside of your home, 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 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. 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 amount is paid to each state.
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 requiring you to collect sales tax, 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 its own rules — check your local regulations.
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 New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He provides tax, accounting, and business articles for freelancers on his website, http://www.cpaforfreelancers.com — which also features a blog and a comprehensive freelance tax guide. Please note, due to the high volume of inquiries in regard to COVID-19, Jonathan may not be able to respond to individual requests for information at this time but he will do his best.