Remote work has become the new normal, but it’s not without its tax implications. As companies navigate the post-pandemic landscape, one important question remains: does remote working create income tax nexus for your business? In other words, if your employees are working from different states, could this mean you owe taxes in those states too? Let’s break it down.
Nexus is the connection a business has with a state that subjects it to that state’s tax laws. Whether through sales, property, or employee activities, your business could be responsible for taxes in any state where it has nexus. With remote work now more prevalent than ever, this is a question all businesses need to ask themselves.
❓ How to Know If Remote Working Creates Nexus
The shift to remote work has resulted in employees working from different states—states they may not have worked from before. If your employees have been working remotely in other states, your company may have created nexus in those states. Nexus can mean having to comply with payroll withholding, income tax, and even sales tax regulations in each new location.
While some states have offered temporary relief for businesses due to the pandemic, those rules are often changing, so it’s essential to stay informed.
💡 Individual Income Tax Payment and Withholding
Any individual income tax and related payroll withholdings are usually sourced to the state where the employee performed their work. As many employees are now telecommuting due to COVID-19, certain states and cities have adopted the ‘Convenience of the Employer’ test.
This means that the wages of those remote workers are sourced to the employer’s location unless it was decided to have the employee in another state based on the employer’s necessity, rather than the employee’s convenience. For example, Philadelphia-based employers who are working outside the city are exempt from the city’s wage tax for the days spent working.
📆 Apportionment
There’s also the issue of apportionment; many states still use a three-factor method of property, payroll, and sales to help calculate the business tax apportionment factor. As employees are now working from home, states could insist that the compensation paid is creating a payroll factor numerator.
💡 State Taxes
Remote work can also affect your company’s state tax obligations. Normally, a business would have nexus for state tax purposes if it has a physical presence in the state. However, with employees working remotely, your company may have a tax presence in multiple states without ever setting foot there.
While some states have temporarily suspended nexus rules due to the pandemic, others have not provided guidance, leaving businesses in uncertain territory.
❓ What States Are Doing
As of now, states are handling nexus rules in different ways. Some, like Alabama, have stated that remote work won’t create nexus, while others, such as Utah and Nebraska, have taken a stricter approach. With the tax landscape constantly evolving, it’s important to stay up-to-date with the latest guidance.
Make Your Next Move
Remote work isn’t going anywhere, and neither are its tax implications. To ensure your business stays compliant with the latest nexus rules, it’s essential to have a proactive strategy in place.
Reach out to us today! Whether your team is working from Texas or telecommuting from across the country, we’ll help you navigate the complexities of remote work and individual income tax in 2024. Let’s make sure your business is covered, no matter where your employees are.