Key State Tax Considerations for Businesses with Remote Employees

Of the many changes that have occurred over the last two and a half years, remote work appears to be here to stay. Employees who have the flexibility to perform their duties with merely a laptop are shifting from the grind of a daily commute to working in the comfort of their own home, or better yet, far-off locations not previously considered. For employers, permitting employees to work remotely is an opportunity to provide quality of life benefits while also expanding the pool of hiring candidates from within driving distance to across the country.

With remote and hybrid working options becoming the norm, businesses need to understand the state tax ramifications and prepare for the risks associated with employees rendering services from new jurisdictions.

Below are some of the considerations that should be top of mind.

Income Tax

Physical presence is generally a strong enough connection with a state to establish an income tax compliance obligation. An in-state remote employee gives rise to state income tax nexus and thus the possibility of tax exposure depending on the respective state’s apportionment formula. Many states utilize a single sales factor as the methodology of dividing income among the operating states. Others employ a multifactor formula which, in addition to sales, also includes property and payroll, both of which are likely to be present where there are remote workers. Depending on a state’s apportionment formula, remote employees may create a sizable income tax debt in states where a business did not previously operate.

Excise and Gross Receipts Tax

In addition, or sometimes instead of, an income tax, some states use a gross receipts tax or excise tax based on a business’ in-state gross income or net assets. Remote employees may expose a company to such taxes when working in one of these jurisdictions due to their physical presence in the taxing jurisdiction.

Payroll Tax

Employers are often responsible for withholding various state payroll taxes, including personal income and unemployment taxes, for the states in which their employees work. Having workers in new, remote locations expands the number of states where the business must remit payroll taxes. Consequently, companies need to track their employee locations to properly manage their payroll tax responsibilities.

Sales and Use Tax

Sales and use tax compliance can be significantly impacted by remote work because services performed by employees may be taxable in certain locations. Sales of property into a state that previously did not have an employee present may have avoided a sales tax collection obligation but now would require tax compliance. Additionally, purchases by a remote employee could create use tax exposure if not properly tracked and accounted for.

Property Tax

Interestingly, some localities assess property taxes not just on real estate but also on tangible personal property, including business equipment like computers and office furniture. Consequently, often overlooked property, such as a company issued laptop computer, may result in a property tax obligation.

Credits and Incentives

In many situations, state and local tax credits and incentives are predicated on maintaining a minimum number of in-state employees or by increasing the hiring of local individuals. Should employment levels shift with workers moving to other locations, businesses may find themselves losing their incentive qualifications. Therefore, companies should review the terms of their incentive programs and continue to monitor employee work locations.

As with all taxes, each state and local tax has its own nuances and specificities. Accordingly, the above list serves as an overview of the types of state tax challenges facing a business in a remote work environment. If you would like to discuss your business’ unique state tax risks and develop a plan to accurately navigate these rules, please contact Alan Goldenberg, Principal and Leader of the State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.