Managing State and Local Tax Implications of Remote Work

The shift toward remote work has transformed the employment landscape, offering greater flexibility and new opportunities for businesses and employees. However, employers must be aware of the tax implications of remote work. Navigating and complying with the patchwork of state and local tax (SALT) laws creates significant complexity for small business owners who employ remote workers.

Tax Withholding for Employers of Remote Workers

As an employer, you are required to withhold certain taxes based on your employees’ state of residence and the state where they perform the work. Though straightforward in theory, it can get complicated when employees work in multiple states or when they relocate during the year.

For example, if your Texas-based business has an employee who moves to Georgia but continues to work for you remotely, you’ll have to navigate both sets of tax laws. Georgia has a state income tax, while Texas does not. This kind of discrepancy demands careful attention to comply with applicable withholding obligations and avoid potential penalties.

Payroll tax withholding rules also might change based upon where the employee is performing work. For example, some states (such as New York) have multiple employee- and employer-funded taxes. As your business grows and employs individuals in multiple states, it might be wise to employ a payroll company to manage your payroll tax compliance.

At the Nexus of Remote Work

In the era of remote work, businesses may inadvertently create nexus in multiple jurisdictions by allowing employees to work from home.

State and local tax authorities have increasingly scrutinized the issue of nexus, leading to significant changes in recent years. The triggers that incur a tax obligation are no longer limited to a business’s physical presence, although that is often one factor. To determine whether the business has an economic nexus in the state, many jurisdictions have adopted some form of the factor-based nexus standard, which considers a combination of a business’s property, payroll, and sales in the state. The implications of mistakes and oversights in income tax apportionment can be severe, so it pays to stay on top of SALT compliance.

Practical Steps to Manage Tax Compliance Risks

Robust risk management strategies are essential to help you mitigate the potential risks associated with a remote workforce. Consider measures such as:

• Regularly review tax nexus. A nexus review assesses where business activities may have created new tax obligations. This proactive measure can help identify potential compliance issues before they escalate.
• Stay informed. Monitor state and local tax laws in every jurisdiction where you have nexus. Subscribing to updates from tax authorities can help you stay in front of policy updates and plan for timely compliance.
• Focus on accurate record-keeping. Maintain detailed records of employee locations, hours worked, and any changes in residency status. This information is vital for determining tax withholding obligations and allowing full compliance with state and local tax laws. They're especially valuable when employees split their work time between two states. Again, a payroll company can manage this compliance responsibility and might be a worthwhile investment for a growing company.
• Educate your staff. Provide resources and training to help employees understand their tax obligations, especially if they are working remotely in different states. You'll also need to ensure that in-house tax and accounting team members receive proper training and stay updated on the withholding requirements in all relevant locations.
• Use the right technology. Adopting tax compliance software can help you track employee locations and significantly ease the process of calculating your withholding obligations for workers. An automated payroll system makes your job easier by tracking workers’ wages and allocating withholding based on the hours worked in each location.
• Recognize the costs. Understanding your tax obligations can help you manage costs effectively and plan accordingly. Include tax considerations in hiring decisions and budget for additional tax and accounting staff to meet compliance needs.

• Clarify employment agreements. Many small businesses considering a remote worker in a new state will bring that talent onboard as an independent contractor, which avoids the need to register for a payroll tax account in a new state. For both employees and contractors, be sure to specify remote work arrangements and the reasoning behind them. This documentation not only clarifies the policy but helps support proper state tax apportionment.
• Engage tax professionals. Professional tax guidance is often a wise investment for business owners managing a remote workforce. Advisors who are well-versed in state and local tax laws can provide valuable insights and facilitate efficient compliance with federal, state, and local tax laws.

Protect Your Business and Your Bottom Line

Staying compliant with state and local tax obligations in a remote work environment requires vigilance and proactive management. Your CRI advisor can offer comprehensive support to keep your business in compliance and operating at peak efficiency, including providing employee training. Contact us to learn how we can help you reduce risk while reaping the most benefit from your remote workforce