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In our current business environment, it is increasingly likely that your company will hire a remote worker that does not live in your state. Your first tax consideration is probably withholding taxes, which are essential for both the employee and your company. Unless your new employee works in one of nine states without a personal income tax, your company must likely register for, withhold, report, and remit payroll taxes in that employee's home state.
During the height of the COVID-19 pandemic, several states provided safe harbors for employees working from home in a state other than where they normally work. However, those safe harbors cannot be relied on when hiring an employee who lives in and will perform their duties outside your state. Some states are passing laws about the number of days a traveling employee can work in that state before withholding is required. For example, in 2021, Louisiana passed a law allowing for up to 25 days of work in the state without a withholding obligation. This does not help your company when hiring a resident of another state who will perform work in their home state.
If you use a payroll provider to administer your payroll tax reporting and payment obligations, it can seem easy to just inform them of the new employee information. The payroll provider will register your company in the new state and start the process of complying with the payroll tax obligations for you. However, this also makes it easy for you to miss other implications of having an employee in a new state for your company.
Does having a remote employee create sales tax obligations?
Generally, having an employee living and working in a state will provide physical presence nexus for other taxes such as sales and income tax. Software has improved the rate at which states can identify companies registered for withholding taxes but not filing sales or income tax returns. Consider whether hiring an out-of-state employee creates other obligations and proactively register and report as necessary. The obligations may be minimal, such as little or no income tax, or you may have minimal taxable sales in the new state. Still, you should assume that, at some point in the future, you will receive notices for such taxes in the new state and will have costs associated with the interest and penalty that may accrue for past periods--even on minimal amounts.
What actions should be taken if a remote employee leaves the company?
It is essential to do the research necessary when hiring in a state where your company does not currently have any activity to inform your organization of all implications a new remote employee may bring. It is also important to note that once a remote employee leaves the company, you should consider whether any obligations created in that state still exist. If they do not, it may be time to file final returns and close any tax accounts.
P&N has a team of experienced and knowledgeable state and local tax professionals to help your organization navigate the tax considerations of doing business--and hiring--across state lines. Contact us to start a discussion.