When it comes to remote employment, employees and employers both face a plethora of benefits and pitfalls. While the cultural pros and cons have been covered, considerations from a setup and maintenance standpoint largely haven’t been addressed. There are important legal and tax implications to keep in mind when it comes to a remote workforce.
Virtual teams existed well before COVID-19, but over the last two years, employees turned not being able to go into an office into a benefit by moving out of their employer’s state. For startups, hiring out-of-state employees became common, as remote-first businesses were created from scratch and talent was vastly more critical than location.
Should your startup start or go remote, keep the following in mind.
Tax implications
Remote workforces have tax implications for their companies. Specifically, there is a state payroll withholding tax. This is generally required for the state where an employee works or provides services, regardless of an employer’s location. This means your startup may need to register and withhold income taxes in several states.
These are complicated issues, and often, the best approach is to engage an expert early.
Here are the questions we ask clients:
- What are your sales and revenue by state?
- Where are your employees located?
- Where is your office located, as well as any other property?
Dollar amounts and property locations matter because each state has a different threshold when it comes to defining whether a nexus (more on that in a moment) has been established or not.
This isn’t something you can ignore. States do pay attention. When you register with a government agency, the state receives your tax ID number and other identifying information. This means you’ve got a presence in that state, and your business will be monitored and pursued for any resulting tax liabilities.
For example, one of our clients was stalled during an acquisition last year because they were discovered to be out of compliance with their remote workforce. So, it’s critical to register in each state where you have employees.
Considering the “nexus”
Before the pandemic, “nexus,” traditionally established by physical presence and/or economics, used to be a single home-office employee for an out-of-state startup. Now, with innumerable employees operating virtually, employers may be considered to have a nexus in the states where employees are working. Employers are then exposed to each state’s income tax, franchise tax, gross receipts tax, and sales and use tax.
As a temporary early COVID-19 relief, some states provided guidance for out-of-state employers of remote workers by waiving the creation of a nexus for state taxes. However, state payroll withholding tax was still required, and as we begin to emerge from the pandemic, rules are being reinforced and continuing to evolve.
At the end of the year, your company likely needs to file the corporate income tax for applicable states, as well as sales tax if a product was sold there. In addition, some states charge an excise tax, which applies to your revenue.
Local labor laws
There are also state and local labor and employment laws. Your business must follow the employment law of the state where your remote employee is working. These laws may be related but are not limited to the following:
- Wage and hours rules.
- Sick and family leave.
- Worker compensation.
- Unemployment insurance.
- Termination and non-competition agreements.
Employment laws differ from state to state. For example, some states call for a separate sick day versus PTO accrual. Another consideration is the Parental Leave Act, which has different parameters depending on the state. Don’t forget that there are city-level laws as well. California, for example, means you have much to manage city-by-city to ensure you’re in compliance.
Get help
These are complicated issues, and often, the best approach is to engage an expert early. Tax and people operations advisers can review your startup’s situation and make recommendations to ensure you avoid issues later on.
Tax advisers will work with clients to determine if a nexus has been established in a state where they have remote workers, which can be important when calculating tax liabilities. Also, getting advice on people operations will ensure employee registration at the state level and compliance with all state laws.
It’s not that remote workforces aren’t a good idea, but there are things that can’t and shouldn’t be forgotten when you’re setting up your startup for success. You don’t want to be doing a great thing for your business — finding the right talent in the right location — and then be hit with a penalty or fine because you didn’t register an employee in a state. Or miss out on an important business opportunity because you fell out of compliance.