One of the unexpected consequences of the COVID-19 pandemic is the proliferation of remote employees. If your business has remote employees, there are tax consequences and rules you should be aware of.
The Rise of the Remote Workforce
On March 15, 2020, numerous states issued stay-at-home orders in an effort to slow the spread of the COVID-19 virus. As a result, many employees who normally worked at an employer’s brick and mortar location shifted to working from home.
While some employees struggled with efficiency, others saw an increase in productivity. Given the cost savings from reducing the size of an office and firsthand experience in productivity being unaffected or improved, many employers decided to make remote working an integral part of its workforce management. Also, many start-up companies during this time were compelled to use a remote workforce, and it became the norm for them.
Tax Consequences of Having Out-of-State Employees
First, whenever you employ someone in a state, you have to participate in that state’s employment tax regime. So, at a minimum, you need to register for withholding tax and unemployment tax in the state.
The presence of an employee in a state may also create nexus. Nexus is when a business has enough of a connection to a state that it becomes liable for income tax and the collection of sales tax. The presence of an employee in a state does not automatically create nexus, but it is a strong indication that nexus has been created. In many cases, a remote employee will automatically create nexus, but this isn’t the case in every state. However, in every case, it does affect the analysis of nexus liability.
Let’s look at an example:
An out-of-state business selling its products to California residents does not have nexus in California if the total sales into the state do not exceed $690,144 or 25% of the total sales of the company.
However, if you add an employee in California, a second factor comes into play. If you pay your California employee more than $69,015, you now have nexus in the state. As a result, the business is now liable for income tax and must collect sales tax on taxable transactions. On the other hand, if you have an employee in Florida whose duties do not include customer interaction, then regardless of how much you pay the employee, you do not have nexus.
The rules vary from state to state, so consult your tax advisor before hiring a remote worker in another state.
Just because a state does not have an income tax, it does not mean that you are relieved of filing obligations. Every state in the nation imposes unemployment tax and most states have sales tax. In most cases, states that do not have an income tax rely on sales tax as a major source of revenue. Furthermore, what is taxed for sales tax varies from state to state. For example, Virginia does not tax electronic transactions such as providing SaaS (software as a service) services. However, Texas does tax SaaS services. So, whenever you add a remote employee, you need to consider the tax impact from not only an employment tax perspective but also from a sales and income tax perspective.
Again, consult your tax advisors before adding a remote employee to make sure you are in compliance with all applicable state tax laws.
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November 11, 2022