In this article, Burkland’s Head of Tax Services, Ardy Esmaeili, and Trang Mai outline three important tax implications created by remote workers.
COVID-19 has opened up the world of remote working, and many employees have moved out of their employer’s state. Additionally, hiring out-of-state telecommuting employees has become more common for startups. When asked, employees say that they are more productive telecommuting, while others claim that they are just as productive as when working at the office. Although remote work has some benefits for both employees and employers, many businesses could be overlooking important tax implications.
Tax Implications Created by Remote Workers
- State payroll withholding tax
- State and local labor and employment laws
1. State Payroll Withholding Tax
The first tax implication created by remote workers relates to state payroll withholding tax. Generally, state payroll withholding tax is required for the state where an employee works or provides services, regardless of the location of the employer. In the wake of COVID-19, many employees have shifted from working at the employer’s business location to working at home from a different state. As a result, the income of the employees may be taxed by the state from where the employees are working remotely, rather than by the state from where the employer’s business office is located. The employer may then be required to register the business and withhold income taxes in several new states.
2. State and local labor and employment laws
In addition to withholding tax, the employer should follow the employment law of the state where a remote employee is working. These laws may be related to the following rules:
- Wage and hours rules
- Sick and family leave
- Worker’s compensation
- Unemployment insurance
- Termination and noncompetition agreement
In general, nexus is established by physical presence and/or economic nexus. Prior to COVID-19, a single home-office employee in a state would trigger nexus for the out-of-state employer. With many employees telecommuting from different states during the COVID-19 pandemic, their employers may be considered to have nexus in the states where their employees are working remotely. Such employers would be exposed to new states’ income tax, franchise tax, gross receipts tax, and sales and use tax.
As a temporary relief, some states are providing guidance for out-of-state employers of COVID-19 related remote workers by waiving the creation of nexus for state taxes. However, state payroll withholding tax would still be required.
These are complicated issues. Burkland’s team of tax advisors can review your startup’s specific situation and make recommendations for our tax clients. Contact us for more information.