PAY ATTENTION TO THE POTENTIAL TAX IMPLICATIONS OF EMPLOYING REMOTE WORKERS
As was mentioned earlier , by adopting a more formal , robust remote work policy , you open your business up to greater opportunities to hire top talent regardless of geographic location . But you could also be opening your business to more tax liability . Whether it ’ s simply an employee working within a different taxing jurisdiction within the same state as your business , or whether your employee works in a completely different state , there are a few tax considerations . Whenever you have an employee working in a different state , you have to be aware of potential state level tax consequences .
• The Easy One To Spot : Payroll Tax
If an employee is living and working in a state , or they are just there working for a good amount of time ( a few weeks ), you probably have state and local payroll withholding to do there . A lot of states that neighbor each other have reciprocity agreements – basically if an employee lives in one and commutes to another there are some rules that help soften the payroll reporting burden this could otherwise create . These state reciprocity agreements , that many companies are currently taking advantage of , usually don ’ t apply to employees living AND working in that other state from where the business is located . It ’ s all too easy to think the relief is broader than it is .
• The Ones That Might Take You By Surprise – State Registration , Sales And Income Taxes
Once you have an employee living and working in another state , you open your business up to all the taxes in that state . Many states have an annual business license / registration fee and filing , some of which are as high as $ 700 per year and non-filing penalties of a few thousand dollars a year . If your employee does more than a very limited number of protected tasks in the state , your business will have income tax there too . Income tax is based on total income times an apportionment factor , so you may pay income tax on revenue that you didn ’ t even earn in that other state . All of your sales into that state , not just the ones your employee might work on , may also be subject to sales tax . At best , the sales tax compliance requirements might mean you have to retrieve a whole new state ’ s worth of sales tax exemption certificates . Annual compliance costs may run a few thousand dollars for each state you add , in addition to the tax burden .
Between additional compliance , state fees , and taxes the decision to locate a worker in a new state , the cost / benefit of adding a remoter worker should be carefully considered . From a tax perspective , it is almost always better to centralize remote workers into as few states as possible . To learn more about the tax implications related to employing remote workers , check out this webinar : www . reacpa . com / COVID-SALT .
By Joe Popp , JD , LLM principal & director of state and local tax services joseph . popp @ reacpa . com ( Dublin office ) _________________________
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