Working from home used to be a luxury that some people had, but most companies would not allow it for most people. Once COVID hit, everyone was working from home. While some companies have already or are looking to bring people back to an office setting, some companies have decided that they will allow people to work remotely full-time.
Allowing people to work from home with no obligation to go into an office has opened the possibility for people to relocate since they are no longer tied to an office. Often, this relocation is out of state, with people trying to get away from places with high taxes or a higher cost of living. This may seem like a huge benefit to both employers and employees, but working remotely can have some serious tax implications for both employers and employees.
Once they move to a new state, the employees will have to file income taxes in the state where they reside, regardless of whether they are W-2 employees or 1099 independent contractors. This is not unusual; having people file taxes in their home state while working in another happens all the time.
The complication for employers is whether having an employee in another state establishes nexus in that state. Sales tax nexus is the contact between a state and a taxpayer before the new jurisdiction has the right to tax the taxpayer. The taxpayer can be either an individual or a business entity. If a company is doing business in that state, the state will want its share of taxes for the privilege of doing business in that state.
While each state has its own rules, there are several possible ways that activity within a state would establish nexus within that state. Nexus is created if you have a physical location or a certain volume of sales or transactions within a state. This volume of business can come from online or catalog sales. Other activities, such as actively advertising, drop shipping, or receiving referrals, can create a nexus. Having an affiliate marketing program active in a particular state also meets the criteria.
Another way that nexus can be established is by having remote employees located within a state. These remote employees do not even need to be full-time W-2 employees. Nexus can be established with 1099 independent contractors. In some states, having traveling representatives can also be enough for the state to require sales tax to be paid. Even attendance at a trade show can establish a nexus with that state.
With the ongoing COVID health emergency, many states have suspended their nexus rules if the activities that would regularly create a nexus are a temporary setup and only created due to the COVID pandemic. However, even those temporary suspensions are being raised, and states where remote employees reside will start to expect businesses to pay state income taxes.
Income tax laws can be complicated and even confusing for many people. Figuring income tax can be further complicated because no two states are the same.
If you run a business and have employees working remotely from other states, you may, in fact, owe taxes in that state. If you are concerned about your business taxes, call us at 718-676-4185 and set up an appointment.