When over 75 million Americans shifted virtually overnight to working from home in March 2020, businesses that never considered hiring remote employees began to do so. More than two years into the pandemic, employees at all levels of organizations continue to be hired and work remotely, expanding the footprint of companies into states where no physical office exists. Hiring remote employees is now a growth opportunity for companies; however, doing so presents numerous tax considerations.
- Increased Registration and Filing Requirements: Employers considering hiring remote employees should be aware of the registration requirements in each state as they differ. There are also different tax implications from state to state regarding income and sales tax, especially for charitable, nonprofit or religious organizations. Exemption status varies by state, while some states provide no such exemption.
- “Nexus”: Nexus means there is a connection in a state that allows the state to impose income or sales tax collection and filing requirements. In addition to state tax, employers should note local requirements, such as local withholding, business license registration and filing requirements. Some localities require the purchase of a business license and the filing of an annual income tax return even if the employer’s only activity is an employee working remotely in that jurisdiction.
- Authority to Do Business/Registered Agent: Once you decide to do business in a state, you need authority. The required forms are available on the Secretary of State websites, and for a fee, you may be required to provide a Certificate of Good Standing from your state of incorporation. You also need to designate a registered agent in the state, which can be an employee who resides in the state or a company that offers that service for a fee. The company can also handle your annual or biannual filings with the Secretary of State in that jurisdiction. Usually, there is no reminder to file in these situations, so be sure to note the relevant deadlines.
- Unemployment: With remote employees, especially with those splitting their time between multiple states, unemployment becomes tricky. Companies only pay state unemployment tax to one state, and the state that receives the tax is where the employee will collect the benefits. Four tests are used to determine unemployment: (1) “Localization of Services,” where services are performed entirely in the state; (2) “Base of Operations,” where the employee begins work or returns to replenish supplies or performs work related to field functions; (3) location from which the employee receives direction and control, such as where the employer or manager supervises the work; or (4) if neither of these three tests can be determined, then the unemployment state will be the residence of the employee.
- State Withholding Tax/Resident Status: Having an employee work remotely in a state — even temporarily — will create a withholding requirement for that state, as well as in every state where services are performed. Thus, it is important to create a system where employees designate their location. Employers have addressed this by restricting employees from working in certain states because they do not want the added filing costs or to be subject to unfavorable employment laws. Some states are invoking the “Convenience of the Employer” test, requiring employees who choose to work remotely to be taxed in the state where their original work office is located. Employees need to be aware of their state of domicile (each has only one) or statutory resident status if they spend an extended period in another state (generally 183 days per year) as a filing requirement will be invoked. Check for states that have reciprocity with each other to make sure the employee is taxed in only one state.
As the pandemic continues, and companies hire more remote employees, remember to make sure your internal controls are firmly in place and accommodate your changing workforce. Watch for evolving state and local rules as many states are considering amending the rules to be more employer friendly.
To learn more, contact BPM’s Tax Director Suzanne Leighton, a member of our State & Local Taxes (SALT) practice.