Remote Work and Your Small Business – Tax Implications

Remote work opens your company to a larger talent pool. However, it may present complications in terms of state and local income tax laws.

As an example, employees who travel or spend significant amounts of time working outside their home state could cause you to establish a taxable presence in another jurisdiction under the 183-day rule.

Location-Based Taxes

Location matters when it comes to taxes for employees living or working from different states than their employer based. An employer could develop income tax nexus in one jurisdiction while having income tax obligations to source or apportion profits accordingly in another.

As an employer, you are legally obliged to withhold federal and, if applicable, state employment taxes from remote worker salaries in order to fund things like Social Security and Medicare benefits for both you and them. These payments provide vital funds needed by both sides.

Your company may also need to withhold state and local business taxes depending on the rules in each jurisdiction in which it does business, while offering benefits like health insurance and retirement plans may need to be taxed differently for remote workers. Being familiar with state and local rules related to remote work reduces any unintended consequences from occurring.

State Taxes

Studies demonstrate that permitting employees to work remotely increases productivity and employee retention while decreasing costs through reduced office space costs and utility bills as well as travel savings.

State taxes — such as income and franchise taxes — may increase as a result of remote work arrangements. Apportionment formulas take into account revenue, property and payroll; thus being an essential element in state tax filing, compliance reporting and financial statement production.

As organizations create their return-to-work plans, they should carefully consider the state tax implications of flexible working arrangements. This should involve reviewing policies related to mobility and work-from-home arrangements as well as an in-depth examination of state tax implications for employees and passthrough entities. Technology allows organizations to better implement enforcement of mobility policies as well as ensure state tax compliance while helping avoid investment dilution or deals that fall through. For further reading see this recent McKinsey article.

Federal Taxes

Since the coronavirus pandemic, working from home has become more common. While its tax impacts may be minimal for some, working from home could impact state and local tax obligations as well as federal employment taxes and benefits obligations for others.

Assuming your business is located in Utah and employs employees in Oregon during a pandemic, withholding income and locality taxes will need to be deducted from their paychecks as per Oregon tax regulations. Furthermore, your company could also be held liable for sales/use tax or value added tax in states where remote employees perform services.

Complexities arise if employees travel between states during a pandemic and work in each location for different amounts of time, creating what’s known as an “economic nexus”, giving rise to tax obligations for their company in each new state – possibly increasing apportionment and compliance issues as a result of this dynamic that is constantly shifting – thus necessitating professional review.

Sales Tax

Most small businesses are familiar with sales taxes, which are levied on certain retail and online purchases. Unfortunately, the complexity of law makes calculating and collecting the proper amounts a challenging endeavor.

Remote work may not always be ideal, but in many instances it’s an ideal option. For example, businesses selling products to customers across multiple states may prefer hiring staff who live and work there instead of paying the costs associated with having physical offices at each of their customer locations.

Additionally, flexible work options can save companies money in other areas as well. They reduce office space needs, utility costs and operating expenses; employees save commuting costs; they may be able to find more affordable places to live; these savings add up over time for companies that must continually hire and train new staff members.