By: Kacie Goff
In early 2020, remote work was trending upward, but it wasn’t looking to be the status quo anytime soon. Then, everything changed. Now, experts predict that by 2025, an estimated 70% of employees will work remotely at least a handful of days a month.
In other words, remote work is here to stay. And for tech startups looking to attract the best and brightest, remote work opportunities can go a long way.
But before you decide to give all of your employees the option to work from home, it’s important that you consider what that would mean for your taxes.
The big issue here is that if your remote employee moves to another tax jurisdiction, you will — in almost all cases — need to comply with specific legal obligations and tax requirements in the location to which your employee moves. For example, let’s say your company is based in New York, but your employee Alice is now working full-time from her home in Rhode Island. Here, we look at the tax implications of you and Alice’s new arrangement.
Implications if employees move to a different state
Whenever an employee of your company moves to a new state, it creates a physical nexus in that state. Per our example, Alice’s working from Rhode Island means that your company is now subject to all relevant tax laws there.
That can have a variety of implications, depending on the state(s) in which your company operates and the state where your employee is now working. Specifically, if they’ve moved to a new state where your business is not registered as an employer, you most likely need to register there.
Additionally, for tax purposes, you now need to consider:
State (and local) income and payroll taxes
Unless your employee relocated to a state with no state income tax, you will likely be responsible for deducting the state-required income taxes. In your situation with Alice, you’re out of luck because the following are the only nine states with no state income tax:
You will likely be subject to payroll tax requirements, as well, and they may differ from your home state. Several states have paid family and medical leave (PFML) programs funded through mandatory payroll taxes.
While some states have reciprocal agreements to simplify income and payroll taxes and prevent your employee from being double-taxed, regulation varies.
There may also be local (e.g., municipal or county) payroll and/or income tax withholding requirements.
Franchise and corporate taxes
Because your employee working in a specific state creates a nexus there, you might be subject to that state’s franchise tax and/or some or all of their corporate tax regulation.
Sales and use taxes
Many states issued waivers at the beginning of the pandemic to protect companies against the need to collect extra sales and use taxes if an employee moved to the company’s state. That said, not all states extended such waivers and whether or not those waivers will continue remains to be seen.
Ultimately, because even one employee working in another state is sufficient to create a physical nexus there, you should look into that state’s sales and use tax regulation.
Unfortunately, it’s not safe to assume that another state’s reporting requirements are the same as the state(s) in which you currently do business. As you work to comply with any new tax regulation to which your business is now subject, make a note of any related reporting requirements (especially relevant deadlines). For example, make sure you stay on top of your reporting requirements in Alice’s home state of Rhode Island.
Other things to consider
All of this is true even if your employee’s move to the state is temporary. Some states require companies to comply with all of the above if any employee works from their state for 30 days or more, for example.
You should also know that the above only gives you a broad overview of specific areas that may have tax ramifications for your company. It’s important to understand all of the implications of your employee relocating to that state. For example, Alice working in Rhode Island will most likely subject you to that state’s workers’ compensation insurance and unemployment insurance requirements.
Ultimately, because each state gets to set its own tax laws, the implications of remote workers vary depending entirely on the state to which that employee moves.
Implications if your employee moves within the state
While this situation is certainly simpler than having a remote employee move across state lines, you still need to be diligent. If the city or county to which your employee relocated has specific tax requirements, your business is now subject to them as a result of your employee’s move (i.e., the establishment of a physical nexus) there.
For example, if your business operates in Brooklyn but Alice moves to Yonkers, your tax requirements would change. As a result, it’s important that your company stays in-the-know about any moves your employees make, even seemingly small ones.
Protecting your tech startup from unexpected tax implications
There are two primary things your organization should do to protect itself from unanticipated tax burdens.
- Establish rules for remote workers. To simplify things, some employers have chosen to mandate that employees need to stay within the same tax jurisdiction as their business. To avoid headaches, it’s helpful to establish this requirement now, rather than once an employee tries to relocate.
It’s also a good idea to explain to your employees the rationale behind this decision. You’re not trying to control their lives, but their moving to another city, county, or state would mean significantly greater tax liabilities (not to mention the increased internal cost of additional filings and reporting).
- Make sure employees notify HR of any plans to move. As it relates to this topic, the absolute worst situation you could find your business in is discovering that an employee has been working from another state for months without your business’s knowledge. As soon as the employee relocates there, a clock starts ticking. Usually, the physical nexus gets established in a brief window (e.g., 30 days).
At that point, your organization is responsible for complying with all of the relevant tax regulations. You don’t want to be caught playing catchup, so make it very clear to every member of your team that they need to inform HR if they’re considering a move. At that point, you can research the tax implications of the potential move and enter into a conversation with your employee about whether or not their relocation is feasible for your business.
Ultimately, remote employees who relocate can present a whole new set of tax implications for your business. You may choose it’s best to simply enforce a rule that keeps employees in the same tax jurisdiction as your business. But if you want support exploring what potential employee moves would mean for your business’s tax liability, we can help. For any questions on this topic, contact our team at ShayCPA today.