LOS ANGELES — For the past three years, Rainier Nanquil has worked remotely in different places in Asia and Latin America.
As a commercial real estate broker for an Orange County-based company and private equity investor, Nanquil, a self-described digital nomad, just needed a reliable phone, computer and internet access to perform his work.
Though he has worked in different places, he kept it simple when it came to filing taxes.
"Since I am still a California resident and U.S. citizen, the filing process has been the same as previous years," Nanquil said. "My home base is still in California, which I am constantly going back and forth throughout the year."
Rather than dealing with the complexity of changing residency — and possibly reaping some tax benefits, Nanquil continues to reside in California for tax purposes.
But for those workers who had the ability and took the opportunity during the coronavirus pandemic and left the state to work remotely or came here to work, they may be grappling with how to handle their new tax situation as the May 17 deadline to file taxes approaches.
"It can get a little tricky," said Grace Taylor, owner of Gracefully Expat, a boutique tax consulting firm that focuses on U.S. expats and remote work tax consulting. "From a domestic perspective, we have to look at it from a lot of different angles. What's the [worker's] relationship with the home state? Are they domiciled in that state? What is the worker's employment status? Every state is different. We have to look at the totality of that person's situation and ties with their home state and employer."
The coronavirus pandemic that surfaced last year has changed the work landscape. In California, the subsequent shutdown orders to prevent the spread of COVID-19 forced employers to have their employees work remotely and accelerated a growing work from home and digital nomad movement.
The days of driving into an office and working a 9-to-5 schedule could be coming to an end. Depending on the type of work, an employee’s home is no longer necessarily where the company they work is.
Advances in technology have allowed more people to have the flexibility to move to one state while working for an employer in a different state. It’s a trend that’s expected to pick up.
About nine million people relocated during the pandemic last year, the National Association of Realtors reported. The report found that one in three adults was working remotely compared to one in 20 before the pandemic.
According to a recent survey of 20,000 workers nationwide by Upwork, 14 to 23 million Americans plan to move because of remote work.
“Combined with those who are moving regardless of remote work, near-term migration rates maybe three to four times what they normally are,” the Upwork study said.
Some of the biggest reasons people are moving include looking for less expensive housing, purchasing larger homes, better climate, and favorable tax rates.
With remote work possibly being the new normal and people living in different states while working in another, there are some tax implications.
There are some pitfalls and tax advantages for remote work, said Christopher Manes, a tax attorney at Palm Springs-based Manes Law, specializing exclusively in California residency tax planning.
“The pandemic may have burst the dam, and it became obvious that people don’t need to be in an office,” Manes said.
For some remote workers, it makes sense to leave California. California has one of the highest income tax rates in the nation. Depending on the employee’s tax bracket, it could be as high as 13.3%.
Manes said during the pandemic, some of his clients moved to tax-friendly states such as Washington, Wyoming, Nevada, Texas, Florida and Tennessee. Those states have no income tax.
"If there is no point in being here (California), and your work is highly mobile, you can move anywhere," Manes said. "Every state has a lower tax rate than California, at least in the top brackets. If you moved to a zero-income tax state or any state that has a lower tax rate and you changed your residency, then you don't owe taxes to California just because you work for a California company."
The drawback, though, is some employers could reduce an employee's pay if that person moved to a different and lower cost of living state.
"A lot of remote workers didn't realize when they moved out of San Francisco to Wyoming or wherever, a lot of companies said, 'Well that's great. But we're going to have to reduce your pay because we based our pay on this area's cost of living, and it doesn't cost a lot to live in Wyoming.'"
Manes added that workers who moved to a different state but pretended to live in California to garner the higher pay risks the possibility of being audited by the Franchise Tax Board, the state's tax enforcement agency.
Manes said for California residents who worked remotely and primarily stayed within the state, nothing changed.
"Worked performed in California is California source income," Manes said. "All of their income is California sourced income, so many W-2 employees will always pay taxes on that."
Additionally, those who moved to California from another state to remote work may be considered a resident and have to file and pay California taxes. If you are in California other than a vacation or temporary purpose, you might be required to pay state income taxes.
"You'll need to file multi-state tax returns," Manes said.
Remote workers need to file the correct tax forms, or they may face certain penalties.
"The main risk would be that someone might fail to file a state return in a state they worked in long enough to trigger a filing requirement," Taylor said. "Then there would be potential late-filing penalties and interest on any unpaid balance."
Both Taylor and Manes said that remote workers should notify their employers that they plan to work in a different state other than where they are based. That company may be required to withhold state income taxes for the state the remote employee resides.
For Nanquil, the digital nomad, he's enjoyed the luxury of remote working.
Working remotely has allowed him to travel to different places and immerse himself in other cultures.
"I traveled a lot while growing up," the 29-year-old Nanquil said. "My inspiration was to eventually be able to financially provide for my family as they got older while also having the ability to continue exploring the world just like I did growing up. I was always fascinated by the people and different cultures I learned about throughout my travels."
Nanquil's main advice for someone looking into working remotely — whether domestic or international — is to be aware of local rules and laws of the destinations.
Besides that, he said remote workers should work hard, prove to their employer that they can be productive working outside of a traditional office, and have fun.
Immerse yourself with the local culture, he said.