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Beginner’s Guide: Tax Implications for Remote Employees

By: Brian Nichols

Remote employees can complicate taxes for businesses. In most cases, having a remote employee creates nexus or the obligation to file tax returns and pay taxes in the local jurisdiction and/or state that an employee works.

For example, let’s say your business is located in Virginia, but you have employees who work remotely in Maryland. The remote employees create nexus for your company in Maryland. That means you need to file tax returns and pay taxes in both Virginia and Maryland.

Register With Tax Agencies

If you have remote employees, your company will need to register with any local and state tax agencies where employees are located. From there you’ll withhold taxes based on those agencies’ tax liability rules.

More States Means More Complexity

Any time you add a state to your company’s tax filing requirements by hiring a remote employee in that state, it creates complexity. The more states you add, the more complex your tax situation, particularly in regards to payroll and sales taxes.

For payroll taxes, any national payroll firm such as ADP or Paychex should be able to handle this easily.

Sales tax on the other hand varies from state to state. Transactions that are not taxable in one state can be taxable in another state. For example, software as a service (SASS) sales in Virginia are not subject to sales tax, but the same sale is taxable in Texas. 

With that said, if you are going to hire remote employees, be sure to research all of your potential tax liabilities and talk to your CPA to plan ahead.

Employees Can’t be Double Taxed

There is a myth that an employee who works remotely in one state could be liable to pay taxes to multiple states based on the company’s physical location. This is not true. A remote employee owes taxes in the state that they primarily complete their work.

How to Simplify the Process

The best way to simplify this process is to hire an independent contractor, instead of using an in-house employee.

Use a payroll service to handle the issue of payroll taxes, especially if you have remote employees working in multiple different states.

When it comes to sales tax compliance, hire a company that specializes in nationwide sales tax filing to simplify the process. These services can be expensive but will help guarantee you comply with the various tax laws you’ll encounter in different states.

Need Help?

If you have questions about your filing obligations for remote employees, contact us online or call 800.899.4623.

Published July 12, 2021

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