Remote and hybrid work have reshaped the workplace. They’ve essentially dissolved traditional boundaries between work and location, making it possible to employ staff from across state or even national borders. Not only has this change introduced new opportunities, it’s also raised some challenges for employers – especially when it comes to the tax man.
In this blog, we’ll discuss the impact of a remote or hybrid workforce on your company’s tax compliance. We want to help you ensure your tax strategy accounts for this.
Understanding State Tax Nexus and its Implications
If you have remote and hybrid workers living in other states, you need to know how it affects your nexus. In a nutshell, this refers to a link between your company and a specific state, and affects your tax obligations. It’s the point at which your business meets a state’s criteria for taxability. Nexus depends on several factors. These include whether you make money, have a physical presence or employ staff , or even have warehouses in a state.
And if this wasn’t complicated enough, having remote and hybrid workers makes it more challenging.
How remote work creates nexus challenges
Payroll taxes are one of the factors considered in determining nexus. And these depend both on where your business is located, and where your employees live, if they work from home.
For instance, if your business is located in New York, and you employ staff in Georgia, you’ll have nexus and tax obligations in both states. This includes registering for payroll taxes, withholding state income taxes, and filing income or franchise tax returns.
Don’t forget that some states also impose taxes on remote and hybrid worker wages under ‘convenience’ rules. Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania tax employees as if they were working in your location, even if they’re working elsewhere, if their location is based on convenience over necessity.
Implications for multi-state businesses
States use different apportionment formulas to calculate how much tax you need to pay them if you have nexus. So if you have workers in different states, you need to consider how this affects your overall tax compliance. You’ll also need to register your workers with their local jurisdictions to make sure your company is compliant with payroll and income tax regulations across the country.
Overall, this means you have the added responsibility of increased admin, and the costs associated with them. And as always, noncompliance with any tax or employment laws means you also run the risk of penalties!
State Income Tax Withholding for Remote Workers
If your business employs remote and hybrid workers from different states, you must consider state withholding tax. As a business owner, you’re required to withhold state income taxes based on where your staff work and live.
Taxes are generally withheld for the state in which an employee physically performs their work. But for remote workers, that’s often their home state. Some states also require withholding if your employee works across state borders, such as with hybrid or full-time workers. This is particularly true if there are no reciprocal agreements between the states in question. These agreements are set up to help you and your workers avoid being taxed twice on the same income by multiple tax jurisdictions.
Basically, such agreements simplify the withholding requirements between neighboring states, so that you only pay income taxes to one state of residence, even if your team lives in a different state.
For these agreements to benefit your remote and hybrid workers, they must give you an exemption form (nonresident certificate) to avoid double withholding.
What about hybrid workers?
Hybrid workers spend part of their working hours in the office, and part working remotely. And if you have hybrid employees who live in a different state, this means they’ll be crossing borders regularly to travel to work.
In these instances, keep track of the amount of time they are in each state for work purposes through time-tracking apps or your accounting software. Alternatively, ask your employee to keep track of their own hours and self-report these in tax season.
Also ensure that you adhere to apportionment rules. You need to withhold taxes based on the number of days your employee worked in each area. To do this accurately, you must keep up to date with tax laws, so that you always use the correct apportionment formulas and know which obligations trigger nexus.
Corporate Tax Considerations for Multistate Compliance
As mentioned above, nexus can be triggered by a presence in a state. In other words, you may need to pay income taxes to a specific state if your employees perform work activities there that are significant to your business operations. Note that this doesn’t mean they need to actually generate an income – this could include, for example, customer service work.
Similarly, remote and hybrid workers could trigger a sales tax nexus, if their activities facilitate sales or customer service in a state. So having remote or hybrid staff could open your business up to additional tax liabilities.
Avoiding unintended tax liability
To ensure that your business doesn’t unknowingly trigger additional taxes, keep the following in mind:
- Conduct a nexus review: Regularly evaluate where your staff live and do their work, and ensure that you’re aware of the nexus implications in these areas.
- Keep track of staff who move: If you have staff who have moved to a new state, ensure that you get their address as soon as possible, to register them with a new state tax authority.
- Use technology for compliance: With tracking tools and accounting software like QuickBooks or NetSuite, you can easily monitor employee work locations and their potential impact on nexus.
Strategies for Ensuring State Tax Compliance
Good internal governance is one of the best ways to ensure compliance with state tax obligations. That means implementing clear policies for remote and hybrid workers. You must specify which states your employees can work from based on whether your company can comply with the tax obligations in those states.
Also outline the compliance responsibilities for both the company, and your employee. This includes a requirement that workers let you know if they change their locations, either temporarily or permanently.
At the same time, regularly reviewing state tax laws – or working with a tax pro that can do this for you – will ensure you don’t get caught unaware by any recent legislative amendments.
When in doubt, get help
Outsourcing your taxes to experts – can help you focus on your business operations while someone else worries about compliance and tax laws. This is especially helpful if you have multi-state tax obligations, where regulations can change at any time.
Don’t let the complexities of multistate tax compliance be overwhelming, if you need help handling taxes across states, schedule a Discovery Call with one of our tax professionals today!
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.