Understanding the Tax Implications of Remote Employees

Tax Nexus

When you hire remote workers, it can create a legal connection to the states in which they’re located, known as a “tax nexus.” This occurs when a company conducts sufficient business activity within a state—by employing workers, selling goods or services there, or both. In the past, the nexus created by employment was clear: employing workers in a state meant having a physical location there with employees working on site. With the rise of remote work, however, the question has become more nuanced.

Compliance Risks

The presence of a tax nexus creates obligations for the business, which can vary considerably from one state to another. This can create a complex network of legal obligations, which presents significant compliance challenges. Depending on their location, employing even a single remote worker in another state could trigger new requirements. This can result in companies being subject to not only new tax and withholding liabilities but also additional registration, wage and hour, and workers’ compensation requirements. Careful navigation of these legal intricacies is critical.

Double Taxation Risk for Employees

A tax nexus can create obligations for not only payroll but also sales and income taxes. Depending on where your business and its employees are located, this could create a situation in which your employees are forced to pay income tax in both their home state and that of your business. In some states, for example, workers must pay income taxes to their employer’s state if they work elsewhere for the convenience of the employer rather than due to necessity. These types of laws are facing legal challenges, but their current impact on out-of-state employees is substantial. To recruit and retain valuable team members, it’s important to understand how your remote hiring practices affect the real value of their earnings.

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