As we mark a year since the beginning of the pandemic, telecommuting and remote work continue to be at the forefront of many business owners and employees. In fact, many companies have decided to keep these once considered non-traditional work arrangements for an extended period of time or even indefinitely. This workforce shift also has businesses rethinking their position on hiring. Geography is no longer a challenge, and companies are hiring more and more employees that are considered out of state.
While there are many advantages of telecommuting and having a remote workforce, there are state tax consequences that both employers and employees need to be aware of.
What’s the Big Deal?
While the pandemic has proven to many companies that their employees can work productively from anywhere, that new mindset can cause big problems. Allowing teleworking employees to work anywhere can create state tax obligations or state liabilities for businesses.
Let’s look at some scenarios of potentially risky situations:
Having remote workers in a state where the business does not do business can create a connection in that state. Thereby imposing new state tax filing and payment obligations for income tax, sales tax, and gross receipts tax.
If an employee works in more than one state, an employer may be required to withhold and remit income taxes to each relevant state. Some states have issued specific guidance on whether remote employees temporarily working in a state due to the impact of COVID-19 create nexus or a tax obligation for an employer who does not operate in that state.
An employee lives in one state but works in another. In this situation, there may be tax liability in both states.
A company’s responsibilities for withholding state income tax for remote workers is complicated by the fact that states have different thresholds at which an employer must withhold. In addition, it is important to understand which state’s unemployment tax will apply. A critical element to minimize risk is to implement a tracking process for all employees. Identifying each employee’s working locations is a big step towards making sure you comply with all state tax obligations.
Business owners and employees are encountering an uncertain tax landscape in this new teleworking and remote world. If you currently have employees that are telecommuting or working remotely or are considering implementing a telecommuting or a remote work policy, please join us on March 23rd for our webinar on State Tax Risks in a Remote/Telecommute World to learn about minimizing exposure and how teleworking is impacting your business.
Karen applies her significant taxation expertise to guide clients through the increasingly complex SALT environment including tax consulting, compliance, and resolution. Over her 30+ years working in the accounting industry, Karen has developed a deep working knowledge of corporate taxation including a specialized focus in state and local sales and use tax, state and local income tax, audit representation, tax planning, consulting, due diligence and mergers and acquisitions.