Has your company switched to a remote work or hybrid environment for employees? Government mandates and other health-related concerns at the beginning of the COVID-19 pandemic caused much of the workforce to transition from an office setting to a remote or hybrid work environment. As the pandemic stretched on and companies extended their remote work options, many employees started spreading out to find new locations to work from.
While many employers have researched return-to-work strategies, they’ve decided to allow employees to continue to work remotely either full-time or part-time based on their roles and responsibilities. The benefit is considerable for employees who wish for more flexibility or less time spent commuting to the office, but it may pose tax-withholding complications for companies.
Tax implications of remote workers
Most state and local sales-and-use taxes and payroll taxes are triggered by what’s considered a nexus event, which establishes a presence in a particular state. While a physical building or warehouse is the most widely known nexus, meeting a sales threshold for sales in that state or having an employee residing in the state can also trigger the tax withholding requirements for that state.
This means, if a remote worker moves to another state, it can complicate your organization’s tax situation immensely. For companies who are located near state borders, employees who previously commuted across state lines but are now working from home can change payroll and sales tax liabilities.
During COVID, many states granted exceptions for nexus events, while others loosened requirements. However, those requirements vary by state, sometimes overlap, and some are even coming to an end. This further complicates whether taxes should be withheld and filed in each state, and whether companies should collect and file sales-and-use taxes.
If you have remote workers, consider implementing a policy that includes (at minimum):
Remote workers who move without notifying their employer could open the company up to the consequences of misfiling tax payments.
Consequences of misfiling tax payments
Whether a remote worker moved without the company’s knowledge, or the company was unaware of the laws in place in the new state, the company remains liable for the payments and potential penalties. When payments are missed or misfiled, state and local jurisdictions may have fines and penalties in place.
For companies that have a worker in a new state where they previously did not have to file sales-and-use taxes, their system may be set up to waive sales-and-use taxes for that state or local jurisdiction. In that case, they may find themselves paying out of their revenue for these taxes that were not collected from their customers.
Solutions to manage taxes related to remote workers
Companies should consider several approaches to minimize the risk of misfiling sales-and-use taxes, as well as payroll and income taxes with a remote workforce.
Our team of accounting professionals can help you navigate the tax complexities associated with remote workers! Reach out to set up a consultation.
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