Your Remote Workforce Needs to Know About Remote Work Taxes

In response to the coronavirus pandemic, remote work skyrocketed in 2020. What started out as a stop-gap measure grew into more permanent working conditions for many employers. Businesses that embraced remote work in 2020 will likely continue to offer the option to their employees into 2021 and beyond. And although work-from-home options can benefit both employees and businesses, small business owners should be aware of the additional compliance burdens they may face as a result.

Fortunately, you have the knowledge and tools like Corvee's software for accountants.

Remote Work Taxes Influence Payroll Tax

Payroll taxes should be your chief concern when allowing employees to work remotely. In general, payroll taxes are sourced to the state where the work is performed. This means that employees should disclose where they are working each day. Are they working in the same state as the business, or are they working from an out-of-state home, vacation home, or family member’s home?

If employees are working in a neighboring state, the business’s home state may have a reciprocity agreement with that jurisdiction. If a reciprocity agreement exists, neither state requires the other to withhold income taxes on behalf of remote workers. Such an agreement allows businesses to source the employee’s wages to the business’s home state rather than the state where the employee is working.

It's a good idea to check if a reciprocity agreement exists between the two states in question. If an agreement exists, you can continue filing payroll reports as you always have. If an agreement does not exist, you clients will need to file employment tax returns in that jurisdiction. This means you will need to:

• Establish a payroll tax account in the new state: In most states, you will need to file a few basic forms with that state’s Department of Revenue to establish a withholding tax account.

• Start collecting location data from their employees: The days you work from the office should be sourced to the business’s home state, and the days they work from home should be sourced to the employee’s home state.

• Set withholding allowances in those new states: Employees select their Federal withholding allowances using IRS Form W-4, Employee’s Withholding Certificate. Many states have their own versions of these forms. These state-specific forms help the states know how much income tax to withhold from each paycheck.

• See if they owe additional state-specific taxes: Taxing jurisdictions may have their own unemployment insurance, disability insurance, or some other state tax.

• Adjust payroll reports: If your business uses a payroll provider, you will need to inform your provider of the change. If you create payroll reports in-house, the payroll department must understand how to reflect the information on the new state’s tax forms.

• Inform employees of the change: You should let employees know that payroll is being sourced to the new state. Though employers shouldn’t provide specific tax advice, you should let your employees know that a change in payroll sourcing may affect their personal income tax returns, and that employees should contact their personal accountants for advice on how to proceed. They may need to file new state tax returns, or they may need to adjust their withholding allowances or quarterly tax payments.

Income Tax

States that have reciprocity agreements for payroll tax purposes may be relieved of withholding tax requirements, but those agreements do not typically extend to the business’s income tax return. In general, income tax nexus is established when the business has a physical presence in another state. This includes employees.

For a company already doing business in multiple states, filing taxes in one more may not be a big deal. Filing in a new state will always take a bit of planning, but the company will have already established reporting practices that make multistate taxation a bit easier. This becomes a bigger problem for small businesses that only file in one state. Turning a single-state business into a multistate business can be challenging.

Multistate businesses are required to apportion their income among the states in which they operate. Apportionment can be daunting for a few reasons.

1. Each state sources income differently.

One state may source income based on where the costs were incurred (called “cost of performance” sourcing), and another state may source income based on where the customer receives the benefit (called “market-based” sourcing). This means that in practice, the same income may be claimed in more than one state, requiring businesses to pay state taxes on more than 100% of their income.

2. Each state’s apportionment rules are different.

Historically, most states apportioned income based on the location of the taxpayer’s property, payroll, and sales, equally weighting these three factors. But over time, more states have weighted sales more heavily than the other factors, with some states apportioning income based solely on sales. Having expertise in this area is a great way to sell tax planning services.

3. Some income should be allocated while other income should be apportioned.

You’ll need to know the difference between allocation and apportionment and know how to apply the rules to each of your revenue streams.

Sales Tax

Most states will impose sales tax collection responsibilities when the business has a physical connection with their state. So, just as an employee’s presence may establish income tax nexus for the business, their presence may also establish sales tax nexus.

Although you won’t be required to pay additional taxes, collecting and remitting sales taxes to a new jurisdiction can be costly from an operational perspective. To comply, you client will need to track sales going into that state, assess the appropriate taxes on those sales, and remit those taxes timely. Many states assess steep penalties on businesses who fail to file or remit sales taxes – up to 25% in some jurisdictions – so determine your sales tax nexus as soon as possible.

If you discover that you have been late to comply with sales tax filings, look for amnesty programs or voluntary disclosure agreements to get them back into compliance.

State Coronavirus Assistance

When coronavirus first swept the nation, some states gave a grace period to businesses whose employees were forced to work remotely. California, for example, said that employees working from California for an out-of-state business due to the Governor’s Executive Order would not establish nexus; those activities would be considered “de minimis” for franchise tax purposes. Other states provided similar relief for payroll tax withholdings and income taxes, but many states provided no relief at all or stated they would assess each business on a case-by-case basis.

These forms of relief are only temporary, but they could give you the time you need to establish good tax practices with the state. By the time that relief runs out, they will be prepared to file payroll, income, or sales tax returns that comply with state guidance.

Understanding these complex nexus laws can take a bit of finesse, but once you nail it, you can save your business a great deal of money. Many businesses are looking for advice on how to save money in 2021 and are afraid that establishing themselves in new taxing jurisdictions will cost them money. But with the right approach, you can save money using software for accountants.