Tax Implications of a Remote Workforce – by Jonathan Sluis, CPA

** This article was originally featured in the June 2023 edition of the Traverse City Business News **

There has been a paradigm shift in remote working following COVID-19 and many employers are now coming to terms with the potential long-term implications of this change. Whether your business is intentionally hiring out of state, or you’ve been thrown into it out of necessity, there are definite ramifications to consider with far reaching implications. Here are three pointers for businesses considering employing remote workers from a tax standpoint.

Know Before You Go – They’re All Different

Before you make the decision to hire a remote workforce or keep an employee who is moving out of state, be sure to do thorough research. Unforeseen tax implications can creep up – one state could have no income tax, whereas another could have taxes you are not used to paying such as local and workers compensation related payroll taxes. Often registration with a state is a minimum first step. “If your employee is a salesperson,” says Andrew Nichols of Integrated Payroll Services, “it can push you into additional taxes, like sales tax, that can get messy and have entity wide implications.” In this case having a sales tax compliance plan is key. There are other implications to consider that are outside the scope of this article, such as the cost of setting up IT and infrastructure to support a remote employee securely and health insurance in another state. The main thing we want to convey is there is a lot to think about!

It’s All About Nexus

When we talk about remote work and multistate taxes, the word nexus, a tie, or a link, inevitably comes up. In the taxation world, nexus is a connection between a state and a business that enables the state to impose a tax obligation on the business. There are three types of nexuses as it relates to multistate taxes: physical, economic and affiliate. Brotman Law defines physical nexus as “the level of minimum contacts that you have in a state.” Contacts can be employees or certain third parties such as independent contractors or vendors. When you have a remote worker in another state, even if they are logging into your server, their presence may constitute nexus for that state. Once nexus is established within a state – the ramifications (both good and bad) are far reaching.

Think of the relationship between US states as a sibling relationship. They generally get along, but not always. And there are times when they disagree. Some, more aggressively than others. Remember that time you had a disagreement with your sibling? Perhaps neither was entirely wrong, but both saw things from a different perspective. You’re going to have conflicted information, depending on what topic and what authority you’re talking to. Some states have what is called reciprocity – an agreement between the states that an individual pays income tax in the state they live in. Others do not.

Seeing the Bright Side

Although the tax and logistic complexities that come with remote work are often viewed as a negative – there are also positives. It can be beneficial if you are hiring someone within one of the states with little or no income tax, thereby creating physical nexus within that state and with it the potential to shift some taxable income out of a higher tax state into a lower (or no) tax state. Some states and cities are attracting remote workers by offering generous relocation, home buying, or construction incentives. It also opens you up to finding employees that you wouldn’t otherwise be able to hire, with different strengths and personalities, and opens your business to other markets you may not previously have had access to.

Whether you have one employee that is requesting a move, or you have employees spanning multiple states, it is imperative that you consider the tax implications of the remote workforce. But don’t be afraid of this shift! Just because siblings don’t always get along doesn’t mean you should give up – working through the complexities can be worth it! Do your research and consult a professional who can help you determine what your tax responsibilities will be. Employers cannot stick their heads in the sand and hope it will all work out or that they will fly under the radar. Having a plan not only allows you to stay compliant with state and local laws, but hopefully allows you to gain positive synergies that accelerate your business.