When COVID hit, many startups were happy to let their team work from anywhere and everywhere. Recently however, some have been blindsided by the legal and tax ramifications of that choice.
To break down all the implications of having a remote workforce, I spoke with two Burkland experts, Brian Lahargoue, Manager of Burkland’s HR Core Practice, and Ardy Esmaeili, Head of Burkland’s Tax Services.
Legal Implications of Remote Workers
State Laws
“From a legal standpoint, one of the big considerations is the laws of the state,” says Brian.
Employment laws differ from state to state. While general federal guidelines and rules do exist, there are state-based variances as well.
For example, some states call for a separate sick day accrual rather than a PTO accrual. Another example is the Parental Leave Act, which has different implications in different states.
And it doesn’t stop at state laws. In some states, like California, requirements exist at the city level as well.
To ensure you are in compliance, consult with an expert about the laws in each city and state where an employee works.
“Incorporate state compliance around your remote workforce so that you’re able to operate effectively and grow your business without worrying about being hit with fines and penalties down the line.”
— Brian Lahargoue, Head of Burkland’s People Operations
Tax Implications of Remote Workers
Employment laws aren’t the only thing that differ from state to state. Tax laws do, too.
In addition to federal employment taxes, every state has different taxes as well.
If an employee moves to another state, legally that means that your company has a presence in that state. In many states, this is technically considered a nexus, which means you are required to register the company/employee in that state so that you are paying the appropriate employment taxes.
“You have a presence in the state by having an employee there, so you may establish a nexus on income tax and sales tax,” says Ardy.
At the end of the year, your company will need to file the corporate income tax for that state and a sales tax if a product was sold there. In addition, some states charge an excise tax, which taxes your revenue.
“Nexus is a big deal. Whatever revenue or gross receipts you have from that state or source, you have to pay taxes on.”
— Ardy Esmaeili, Head of Burkland’s Tax Services
States are Meticulous
Lest you think this is something that you can ignore, it’s important to note that states pay close attention. Recently a Burkland client encountered a hold-up and fines during an acquisition because they were out of compliance with their remote workforce.
When you register with a government agency, the state receives your tax ID number and other identifying information, at which point you maintain a presence in that state; whether that’s an office or a remote employee. The state will then monitor and pursue any resulting tax liabilities.
So again, it’s absolutely important to register in each state where an employee works.
“It’s a time-consuming process but it’s an important legal one, because you don’t want to be hit with a $15,000 penalty or fine because you didn’t register an employee in that particular state,” Brian says.
Burkland works with their clients to determine if nexus has been established in a state where they have remote workers, and this information is used when calculating tax liabilities. Additionally, Burkland’s People Operations team will register all employees at the state level and take any other required steps to ensure that the client is in compliance with all state laws.
The Consultation Process
When Brian and Ardy consult with clients, they need three questions answered:
- What are your sales and revenue by state?
- Where are your employees located?
- Where is your office located as well as any other property?
The dollar amounts and property locations are particularly important because each state has a different threshold when it comes to defining whether a nexus has been established or not.
Yet both Ardy and Brian agree, there are not just legal and tax implications around a remote workforce. Many startups are now experiencing the challenges of managing culture remotely.
Managing Culture Remotely
When companies started working remotely during COVID it impacted the culture. Employees no longer met in person, shared weekend plans in the break room or took impromptu lunch or coffee breaks together. Moving all conversations and work online impacts communication and slowly this will change a company culture.
“How do you define and build culture in a remote environment? That’s the key component that founders need to take into account,” Brian says.
Engagement
Brian affirms that engagement is a key aspect of culture. Engagement doesn’t mean employee happiness or satisfaction. Engagement means your employees are willing to commit and give the extra effort so the company can thrive and be successful.
Even before the pandemic began, engagement was an issue for many companies. According to surveys, only 20-25% of employees felt engaged.
Now, in a remote environment, that challenge becomes even more pronounced.
Why is it such a priority?
Simply put, a high engagement level leads to higher productivity — and that leads to higher revenue for the company. It is especially important for fast-growing startups to focus on cultivating an engaged remote workforce.
Mental Wellness
Another key aspect to building a strong remote workforce is mental wellness. Due to COVID, many employees have spent the better part of a year isolated from family, friends, and co-workers. Many are struggling with anxiety and depression that was brought on or intensified by the pandemic. One thing most employees want is more human interaction. For many, the idea of continued remote work is a non-starter.
“I conduct a lot of interviews,” says Brian, “and a lot of people are done with fully remote work and want to be in an environment where they’re mixing and mingling with others.”
Taking steps to recreate employee socializing, trust, and team bonding in a remote environment is important for mental wellness.
Those startups that focus on their remote employees’ mental wellbeing and engagement, as well as the tax and legal issues around remote work, will find themselves in a stronger position moving forward. Both Brian and Ardy agree this is key to building a remote workforce that is not only compliant but productive.
This discussion with Brian Lahargoue and Ardy Esmaeili was taken from our show Startup Success. Browse all Burkland podcasts.