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Remote work opportunities are sought after attributes for job hunters of all generations. The advantages include reduced overhead costs and increased employee satisfaction. Small business owners need to be aware of some tax implications.

Understanding tax implications to avoid potential penalties and ensure compliance with tax laws is necessary for onboarding employees. State tax withholding is required in the state the employee resides. You, as the employer, will also be required to establish and pay state unemployment tax in that state.

Some states, such as Tennessee and Florida, do not impose state income taxes, relieving employers of this withholding obligation. Other considerations are the Convenience of the employer rule, such as Pennsylvania and Nebraska, where wages are sourced to the location of the employee’s assigned office.  States such as Virginia and Kentucky have reciprocal tax agreements with surrounding states where taxes are paid on the related wage income of the state of residence not the nonresident state of work.

State Wage and Hour laws apply to the state where the employee works. Employers are required to comply with wage and hour laws such as paid leave requirements, overtime/double time and minimum wage.

Other state law considerations include:

  • Worker Classification (employee vs independent contractor)
  • Disability Insurance
  • Tax treatment for employee benefits
  • Garnishment restrictions or limits
  • Privacy
  • Licensing Requirements for specified industries

Workers Compensation is based on work location. This means an employer may need to establish workers compensation in multiple state increasing expense.

An employee’s presence in a state may be enough to establish nexus in that state for an employer. Triggering general business activities like those in the business’s home state. The business may be required to register with the secretary of state and relevant tax authorities, provide a registered agent address, and pay corporate and business activity taxes, sales taxes and employment taxes, including employee withholding. There could be state and local licenses and business permits as well.  An employee’s presence can also trigger Sales and Use Tax or Business Personal Property Tax.

Companies that are considering permitting employees to work anywhere (especially in states in which the employer is not already registered) should consult with their trusted advisor, payroll company and possibly tax counsel. An organization could inadvertently create entirely new legal and tax obligations where none exist today by permitting employees to work from anywhere.

Business owners must educate employees about the potential tax implications of remote work and stay informed about changes in tax regulations. Consulting with a professional can provide valuable guidance in navigating the complexities of remote work taxation and ensuring full compliance. Contact us for guidance in addressing your remote work tax concerns.