As the COVID-19 pandemic swept through the country, advancements in technology and remote work arrangements meant that many companies began to rely on remote work arrangements to ensure continuity and business as usual. Now, almost three years later, remote work arrangements have become increasingly common. However, the location independence and flexibility that accompanies remote work arrangements can present numerous considerations for businesses to weigh—especially companies that have transitioned to 100% remote work models.
Remote Work Brings Both Opportunity and Cost
The opportunity to employ remote workers has offered businesses many efficiencies, but it comes with some unanticipated costs. Over the past two years, our tax advisors have discussed many of these issues with increasing frequency as they work to ensure that our clients are compliant with IRC and state requirements. Some of the most common issues include:
1. State Tax Nexus
In this age of remote work, it is imperative that both employers and employees plan for tax implications triggered by state tax nexus, which is the connection between an entity and a tax authority that creates a tax filing obligation.
In June 2018, the United States Supreme Court ruled 5-4 in South Dakota v. Wayfair that states can mandate that businesses without a physical presence in a state with more than 200 transactions or $100,000 in-state sales collect and remit sales taxes on transactions in the state. This decision overturned the Court’s previous and longstanding physical presence rule, and dramatically changed the way businesses operate. Since Wayfair, most states have adopted new rules defining what establishes a sale and use obligation, or a nexus. Because no two states are alike, tapping into the expertise of a qualified tax consultant is the only way to ensure that your company is in compliance with the states in which you conduct business. The alternative—costly and unexpected penalties that affect your bottom line.
2. Cross-Border Legal and Tax Compliance Issues
Employing workers outside the state or states where a business operates creates nexus, and therefore subjects that business to the tax regimes of that state. That means that employers may be subject to state income taxes, gross receipts taxes, sales and use taxes and even municipality taxes. With an understanding of each state’s nexus triggers, our advisors often counsel clients to withhold state taxes for remote employees in certain states.
3. Workers’ Compensation
Each state requires employers to register for, and obtain, Workers’ Compensation in the state where an employee is performing services. Understanding and abiding by the requirements will help employers avoid liability and significant penalties that may result from noncompliance.
4. Unemployment Insurance
Remote workers who are employed by an out-of-state business are also required to register for Unemployment Insurance and pay premiums in the state where they perform services.
5. Convenience Rule
If an employee’s job is based with an employer in one state, but they live in another state out of convenience, rather than employer requirement, that employee could be subject to additional taxation as a result of the “convenience rule.” In this case, the employee will owe income tax to the state where the job is based. Both employers and employees must be aware that depending on the states involved, the “remote state” taxes paid may not credit home state tax, resulting in double taxation. We encourage employers to be vigilant in providing information and updates to employees regarding potential liabilities and associated penalties for noncompliance.
6. Localized Compensation
In recent years we’ve seen a paradigm shift where many remote workers are relocating away from high-cost urban areas. Localized compensation is a quantifiable offset to additional Workers’ Compensation and Unemployment Insurance costs associated with this new employment paradigm.
A Shared Mindset for Growth – Get in Touch With Us
With a proactive tax partner by your side, you can feel confident that you will be in compliance with state and federal tax obligations no matter where your employees work.
For more information on how our entrepreneurial tax advisors can contribute to your success and achievement through leading-edge tax consulting and planning, contact us here or call us at 561.453.1441.
LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.