The Focus - Our Tax E-Newsletter
Navigating the Tax Complications of Remote Employees
The rise of remote work has transformed the way businesses operate, allowing companies to provide increased flexibility to their employees, while having the ability to hire from a global talent pool. However, the shift towards remote work has also introduced a myriad of tax and compliance challenges that businesses need to be cognizant of.
Although understanding the regulations surrounding remote work can be challenging, there are costly consequences if an entity does not comply. Therefore, if your company is utilizing a remote work structure or considering implementing one, we have compiled the below areas you should be considering.
If a company hires remote employees residing in different states or countries, they must navigate a labyrinth of withholding requirements and reporting obligations related to payroll tax. State income tax withholding rules differ significantly, making it essential for employers to determine the correct rates for each remote employee's location. Failure to withhold the correct taxes can result in penalties and interest.
Additionally, employers need to ensure they comply with the differing reporting requirements of each state and jurisdiction their employees are working from. This includes filing quarterly or annual payroll reports, which vary from state to state. Keeping track of these requirements demands meticulous record-keeping and an understanding of the tax regulations across jurisdictions.
While your payroll tax provider can assist with these reporting requirements and record management, companies must be aware of the additional compliance issues that need to be taken care of and must know what questions to ask remote employees. The most common and helpful question may seem obvious, but is often overlooked:
- Where are you working from? If your remote work location changes, even temporarily, notify us.
If an employee typically works remotely in your company’s home state, you may think you do not need to worry about any additional payroll tax withholdings in other states. However, if your employee has a second home in another state and will be working remote from this location, you could be required to temporarily change their payroll tax withholdings, depending on a variety of factors such as:
- How long the employee will be working in a different state.
- The reason the employee has temporarily relocated.
- What state your company resides in, and what state the employee is now working in.
Regardless of whether your company has adopted a remote or hybrid model, you will still need to be cognizant of the potential complications that could arise from allowing employees to work remotely. Every state has different regulations for withholding requirements, so be sure to notify your payroll tax provider or your tax professional at Dermody Burke & Brown if you have employees operating remotely out of different states.
Although the payroll tax implications listed above may seem like the biggest concern when an employee is working remotely, business tax filings should also be considered. In some circumstances, remote employees working out of state can trigger business tax “nexus” - a sufficient connection to a state that triggers tax obligations.
Historically, businesses were only subject to state taxes in jurisdictions where they had a physical presence, like offices or stores. However, with remote work and the ever-evolving business environment, a single remote employee working from a different state can create nexus, exposing the company to that state's business tax. Each state defines nexus differently, adding to the complexity for employers.
If you have an employee working remotely in a different state, you should be aware of what duties the employee is performing in their remote position. Most states consider what type of activities and benefits are being performed in their state to assess nexus. For example, is the remote employee:
- Approving or accepting orders or deposits
- Attending meetings or trade shows
- Conducting training or seminars
- Hiring, training, or supervising personnel
- Handling customer complaints, etc.
Depending on the duties completed by your remote employee, and the state they are working out of, you may trigger income tax nexus. This means an additional tax filing, as well as an added business expense for the company. Depending on the state, the business tax, as well as any penalties and interest assessed for missing a tax filing, could vary greatly.
As discussed above, utilizing remote employees can subject a company to a variety of tax compliance requirements. These are often complex to navigate, as every state has varying rules. Failure to comply can lead to costly penalties. Therefore, if you have employees working remote, even temporarily, it is important to notify your tax professional at Dermody, Burke & Brown.