I will be moving to Texas, while continuing to work remotely for a company from California. How will taxes work?

[jcfrancisco]

I am a young adult in my mid-20s and I am moving out for the first time next month to Temple, TX. I will have the fortunate opportunity to be able to bring my job with me and continue working remotely, once I leave California next month. My manager and I have been talking about how the tax process will work and I need some clarification so that I am well-prepared by the time I move out. Admittedly, I am not that well-versed when it comes to taxes in general, so any resources or information would be very helpful.

Some information about my situation:

- I currently work full-time and my role might be switched to a freelance role by the time I move out. I will then start working under a 1099.
- I have been using Gusto as my payroll service. My manager will start paying me through either Upwork or Paypal, once I move out.

Some additional questions about my situation:

1. My manager suggested that I might need to get myself some sort of business license or something if I want to continue working remotely. Is that true? Or is this only for people who wants to start their own business? I would like to start a business one day but currently, I want to only focus on working for my employer to make things less complicated, while I settle down after moving in. He suggested to contact the City Hall in Temple for more info, but I just want to be absolutely sure.
2. One of the few things I know about taxes in TX is that there are no state income taxes, meaning I can receive more money in return. Will my manager have to adjust how much I'm being paid, in accordance to these tax conditions in TX?

Thank you very much for reading.

[BarbL]

Employees who work remotely will generally pay taxes to the state in which the work is performed (the "physical presence" rule).  If all of your work will be performed from your new home in Texas, you will fall under Texas rules and not be subject to any state income tax.  

If you employer switches your role to that of a freelancer, you will be considered self-employed by the IRS.  You will file a Schedule C along with your tax return, and be subject to self-employment taxes.  As an employee, you have been paying 7.65% of your pay for social security and medicare taxes, and your employer is matching that amount.  When you are self-employed, you are both the employee and the employer, and will pay both parts of that tax.  Keep this in mind when negotiating your salary as a freelancer.

The IRS has distinct rules for classifying someone as a freelancer versus an employee, an employer cannot simply reclassify unless the employee's job description and role changes.  More information can be found here: Employee or Contractor?

A remote or work-from-home employee will not need a business license, but you should check with the city to see if they require licensing for freelancers.  It usually depends upon your occupation, as well as local ordinances.

[jcfrancisco]

Hi Barb, thank you for the response!

So basically, you are saying that it would be easier if I were to remain as an employee, rather than have my role changed as a freelancer? If any, what kinds of arrangements would my manager have to set up, if he wants to keep me as an employee who will continue to work remotely for his business? Will there be any additional legal or financial complications he will have to sort out, or will the process be simpler than it sounds?

[BarbL]

Yes, it would definitely be easier for you to remain as an employee.  It typically makes more financial sense too, unless your employer is willing to pay you more as a contractor to compensate for the additional taxes you will owe.  Contractors don't receive other benefits either, so that must be factored in.  Keep in mind that the IRS determines what a contractor is (versus what an employee is); it's not as simple as being re-labeled while performing the exact same role.  

From a tax perspective, the only difference for your employer will be figuring out the unemployment taxes on a remote employee.  Texas has no state income tax, so that simplifies it a lot.