Tax Implications of Using a Remote Workforce
Do you have employees working remotely from another state? It could cost you next tax season. Since the pandemic started, the trend toward remote work has accelerated for many businesses. While having a remote workforce has its perks—from lower overhead to allowing employees to live anywhere they please—it also comes with tax compliance risks to consider.
Tax Implications for Remote Workers
For starters, you could be liable for additional state and local taxes if you have employees who reside and work in a different state from where your company is physically located or operates. That’s because when an employee works outside the state where the employer operates, it creates a physical “nexus” that can subject the business to the taxes of that jurisdiction. This may include state and corporate income taxes and gross receipts taxes, and sales and use taxes, along with other taxes levied at the city or county level.
While some states waived this rule in 2020 for businesses that allowed employees to work out of state temporarily due to the COVID-19 outbreak, the pandemic-related reprieve was not meant to be permanent.
Additionally, if you have an employee who has relocated to another state since the pandemic and telecommutes, you may need to update the amount of state tax you are withholding from their paychecks. And if your remote workforce is large or widespread, this can get complicated. Few employees are aware of the tax liabilities of working out of state, so you can’t depend on them to keep tabs on this for you.
A recent study by talent mobility software provider Topia found that 28 percent of employees have worked outside their home state or country since the pandemic began, but only one-third reported all those days to HR, putting their employers at risk for incorrect state tax withholdings—and hefty tax penalties in the event of an IRS or state or municipal tax audit.
As workers become increasingly remote and mobile, the onus falls on employers to keep track of where employees are working (and when) for payroll tax compliance. Remote work policies should specify where employees can work and how they should self-report their work locations. Not only does this keep HR in the loop about employees who are working out of state or in another city, but it can be important knowledge to have in case of an audit.
Different Rules for Different States
Remote employees who have spent some time working in a different state may also be required to pay income taxes to more than one state on the same earned income. States vary significantly when it comes to their rules on this. Some don’t tax income at all for nonresidents, while at least two dozen operate under a “first day” rule, which requires nonresident workers to pay state tax from the first day they work remotely inside their borders. Still, other states like Arizona and Hawaii have waiting periods, allowing nonresidents to work there for more than 30 days without being subject to state income tax.
Others use earned income thresholds to determine whether a nonresident owes state taxes or applies a combination of rules. In Georgia, for example, workers must meet state withholding requirements if they have worked there for more than 23 days or made $5,000 (or 5 percent or more) of their total income in Georgia.
Six states, including Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania, have a “convenience of employer” test for remote workers. An employee whose job is based in one of those states, but lives and works elsewhere out of convenience instead of because their employer requires it must pay taxes in that state. Though it may be possible for a Connecticut telecommuter, for instance, to receive a credit for taxes paid in New York, that reimbursement is limited to what Connecticut taxes on the employee’s income.
Some states and regions with frequent commuter traffic, such as Maryland and the District of Columbia, New Jersey and Pennsylvania, and other contiguous areas, have reciprocity agreements with neighboring states to prevent double taxation for employees who live in one state and work in another. Maryland residents who work in D.C., for example, only owe taxes in Maryland.
When it comes to taxes on unemployment insurance, employers are generally only required to contribute to UI taxes in one state per employee, but they must ensure that the employee’s services are actually performed in that state. If not, they may need to file for employee UI coverage in the state where the employee is actually working.
Strategizing for the Future
If you plan to continue or expand your remote workforce in the future, it’s important to stay up to date on tax regulations and mandates in the states where your employees work—and to keep them in the loop about their obligations, too. In some cases, you may be able to take advantage of tax savings if employees choose to work outside of high-tax jurisdictions or move to a state with no income tax. Whether you need help leveraging the potential tax perks or minimizing the compliance risks of remote out-of-state workers, we are here to help you navigate the myriad of state requirements and develop the best tax strategy going forward!
Admin | 08/19/2021