Remote Workers and Tax Compliance Risks

By AdminAssist tagged in Best Practices and Taxes - Mar 18, 2021 10:15:00 AM 5 min read
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The way the world works is changing. A PwC survey of over 650 CEOs found that 78 percent embrace remote collaboration and believe it's here to stay for the long-term. In a survey of employees, 96 percent desire some form of remote work, with 65 percent expressing the desire to be full-time remote workers.

While the trend toward remote workers has long been forecasted, 2020 spearheaded the change with practically an overnight adoption of remote work environments for major companies around the world. Now, businesses of all sizes are embracing the opportunity, and many want to continue with remote or hybrid work environments for the long-term. However, it's important that companies carefully consider their tax compliance risks before opting for a remote workforce.

What Tax Laws Apply to Remote Employees?

If your remote employees are just a couple blocks down the road from your business' physical location, you're unlikely to run into any big tax complications or surprises. Of course, one of the top benefits of having a remote workforce is access to a global talent pool. Moreover, one of the top benefits for employees is that they can work from anywhere.

With all of this in mind, the primary tax complications and risks your business will face is when your remote employees are located out-of-state. To follow is a list of the most important and pressing tax compliance rules you need to be aware of for your remote employees.

Home Occupation Permits

Depending on the municipality where your remote workers reside, they may be required to obtain a home occupation permit. Some states have strict permitting requirements and they can vary from county to county, and even city to city. If you are paying payroll taxes in a state and do not hold home occupation permits, you are likely to run into problems.

Check your employee's city and county zoning laws and inform them if a permit is required. In some areas, the requirement for a license has been suspended temporarily.

Foreign State Qualification

If your business has a corporation or limited liability company (LLC) in one state and employees working in another state, you may need to qualify your corporation or LLC in your employees' state. The need to do this is dependent upon how many employees are working in the "foreign" state, the type of work they're doing, and how long they'll be working in the foreign state.

This process entails applying for permission to do business in the foreign state. However, foreign state qualification leads to additional compliance obligations, including the requirement to maintain a Registered Agent and filing annual reports in the foreign state.

Tax Nexus

"Tax nexus" describes circumstances where a business has a tax presence in a foreign state (i.e., they are "doing business" in that state). Depending on the work of your remote out-of-state employees, your business may experience tax nexus.

Tax nexus means your company will be subject to the sales tax, income tax, and other tax laws of the foreign state. This can add up in terms of operating costs and, if you fail to realize you're subject to these laws until after-the-fact, you could face a large and unexpected tax bill, in addition to potential penalties for failing to file or for filing late.

Workers' Compensation

Most states have workers' compensation requirements, but things grow more complex when it comes to remote workers. If a remote worker is injured "on-the-job" while they're at home or in another location, can they claim benefits?

State laws differ regarding what constitutes a work-related injury and what doesn't. With work-from-home employees, the lines blur. To help protect your business, set clear guidelines regarding work hours and job duties for your remote employees so they can distinguish work-related claims from other incidents.

State Tax Withholding

Both employers and employees have to pay taxes on the money workers earn. However, these taxes must be paid to the state in which the employee performs the work.

  • Some bordering states have reciprocity rules, where employees residing in a neighboring state pay taxes to their employer's state. 
  • Additional rules may apply to employees that travel to job sites in other states.
  • Some states subject employees to tax in both their resident state and employer's state.
  • Hybrid employees, who work from home part-time in one state and at the office full-time in another state, will add additional complexity.

If your business is headquartered in New York, but your remote employee works in Colorado, the physical presence rule means state taxes and unemployment taxes must be paid to Colorado. This is true even if your business doesn't have a physical office in Colorado.

Understand Your Tax Obligations

Businesses large and small are facing difficulties navigating the "new world of work," but there's no doubt that hybrid and remote workforces come with many benefits. If your company is already utilizing remote employees, or you're hoping to expand your remote workforce, understanding your tax obligations is crucial.

While it may seem like a complex, intimidating set of rules to navigate, the right tax professionals can help ensure your business is in compliance with all applicable laws. If you're in need of advice about recruiting and staffing, reach out to Admin Assist and see how we can help save your business time, money, and stress.