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Stable Rock

01/31/2024

Key Takeaways

  • Remote Employees Can Trigger New Tax Obligations: Hiring workers in other states can create a tax nexus that subjects your business to state-specific tax, payroll, and labor compliance requirements, even if you have no physical office there.
  • Double Taxation Risks Can Impact Employee Retention: Some remote employees may face income tax in both their home state and your business's state, making it critical to evaluate how remote policies affect the net income of your workforce.
  • Plan Remote Hiring Strategically to Reduce Risk and Cost: Assess the total cost of compliance in each state before hiring, and consider expert tax guidance to navigate multi-state rules, avoid penalties, and build a sustainable remote workforce strategy.

In the ever-evolving landscape of work, businesses are increasingly embracing the flexibility and efficiency of employing virtual teams. However, this shift to remote workforces brings its own set of challenges. The tax implications of remote workers can be complex for business owners. To ensure your company’s compliance and financial stability, it’s critical to understand how your remote workers impact your tax obligations. In this article, we’ll shed some light on key tax considerations for businesses with 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.

Tips for Employers

Given the complexity of employing workers in multiple states and the significant costs that can arise if your business fails to comply with applicable laws, it’s important to plan your remote hiring practices carefully. Follow these tips for creating remote hiring policies and procedures:

  • Understand the full cost of employing workers in each applicable state, including:
    • Additional tax liabilities for your business
    • Potential for double taxation of remote employees
    • Other additional costs, such as supplemental workers’ compensation insurance or wage and hour requirements
    • Administrative expenses that must be incurred to comply with new requirements
    • Possible noncompliance penalties
  • Use this information to create a strategy for remote hiring. This may include, for example, exploring talent pools in states that have the most favorable tax laws around remote work.

Accurate assessment of the tax consequences of your remote hiring decisions requires careful evaluation of state tax laws. Additionally, properly filing tax documents in multiple states is a highly complex task. As a result, expert guidance is essential to ensure your business remains in compliance and avoids unnecessary and unforeseen taxation.

How Can We Help?

Our established team of trusted tax professionals has decades of experience advising businesses that operate in multiple states. We can help ensure you stay compliant with all applicable tax laws while helping you understand how to optimize the tax efficiency of your hiring practices.

Stable Rock has decades of experience working with startups and enterprises across industries. We offer cost-effective solutions with deep expertise in accounting and tax as well as outsourced CFO and back-office services to fuel our clients’ success. Learn more about us, or explore our blog for more tips and insights.