If you are employing remote workers due to COVID-19 or thinking about a more remote-based workforce, consider the following tax implications.
COVID-19 has forced numerous companies to temporarily shutter their workplaces. This has resulted in in employees working at new or remote locations – be it a disaster recovery site, at home, at the home of a friend or relative, etc. With the increasing availability of communication and productivity tools like Zoom and Microsoft Teams, as well as the continued uncertainty of how to best keep their people healthy and safe, employers have been mixed on return-to-office timelines. So, what do you need to know if you have individuals working remotely?
Remote work raises the question of whether an individual or a business has established a tax presence in a different state. Tax presence, or nexus, is determined by 3 factors – payroll, property, and sales.
Payroll taxes, or employment taxes, are an inevitable part of hiring and paying employees. And they occur at both the federal and state level. State income tax withholding is necessary for the state in which an employee provides services, not where the employee resides or the location of the company’s office. Thus, remote work may cause some complications. For example, an employee whose company’s office is in New York, but who lives in New Jersey and has spent time at a family’s home in Colorado during quarantine, may have earned income in 1 or all 3 of these states.
Each state has its own rules as to the time an individual needs to work before considering income earned in that state. For example, in some places, workers could owe taxes to their temporary state after just one day of work. In others, it applies after a 30-day period. Often, a taxpayer may get a credit from their home state for taxes paid to another. It is therefore important to know where your employees are working.
The good news? Currently, thirteen states and the District of Columbia have indicated that they won’t tax workers who have relocated temporarily due to the pandemic, according to the American Institute of CPAs. Instead, those people will continue to pay taxes to the state where their employer is located.
What could this mean for you?
If you have employees whose remote working is not expected or deemed to be temporary, or you are hiring new employees into remote positions, you may have to withhold payroll taxes in these remote states. Fortunately, registration is relatively easy.
- Register your business with your state’s tax agency. This will allow you to withhold and remit state withholding taxes.
- Register for workers’ compensation insurance within your state. All states, without exception, require that employers pay workers compensation insurance in case employees are unable to compete work.
- Register for unemployment insurance with your state’s work force or employment agency.
Property & Sales
Property is fairly straight-forward. If you have bought or rented property in a state, you may have created nexus there. Creating sales nexus is more specific to the type of business you are in (i.e. product versus service). In addition to understanding whether your remote workers have created the need for you to file income or other regulatory filings within a state, one of the most important areas to be aware of is whether your business has become subject to sales and/or use taxes.
In summary, a remote working model may be advantageous to your business – beyond serving as a temporary solution while we continue to fight through the pandemic. But it is important to understand the potential tax ramifications.
- Know where your employees are working from
- Monitor their times spent working in that location
- Stay up-to-date on guidance issued by states where you have employees
- Track the time spent working at your temporary remote location
- Monitor your tax withholdings on each paystub
- Communicate with your employer if you are planning to stay remote after it is time to return to the office
As we approach the end of the year, without a clear picture in sight for 2021, it is important to consider the benefits and drawbacks of a remote or partially remote workforce. For many companies, the past several months were a fast-track introduction to remote work for their existing workforce. If you are considering on-boarding new employees remotely, the Talener team can help you to fine-tune your process and create the best plan to hiring new staff in a remote environment. From expectations to geography, interview process to on-boarding – our team is available to you.
Questions? Contact the team at email@example.com