Tax Impact – Remote Employees in New States
Decentralized work is booming. Employees can work from all over the country. At the same time, it’s creating a web of compliance complexity for agencies.
“What do I do if I have a remote employee working from a new state?”
Rule of thumb – follow the “physical presence” rule.
This states you are required to withhold employee taxes in the state where the work is performed.
HQ is in New York but your employee works from home in Ohio.Under the “physical presence” rule you are required to withhold taxes in Ohio.
Yes – even if you don’t have a physical office in Ohio. This can impact everything from income taxes to workers’ compensation. Figuring out how to be compliant gets complicated. Especially when each state has their own requirements. Here’s what you need to know:
Register with the State
To pay employees in a state you will need to register on 3 levels:
- The Secretary of State – to notify them you are “doing business” in the state
- Department of Labor – for payroll, withholdings and unemployment
- Department of Revenue – for income tax purposes
The process can get complicated and comes with penalties down the road if it’s not done correctly. Look to outsource the registration process to your CPA.
Nexus & Taxes
Nexus is another way to say that you a have a “presence” in a state.
Many things can create nexus, but is most often created through employees and payroll.
Once nexus is established, the compliance burden increases around:
- taxes (personal & business)
- and insurance
Watch out – your agency will be subject to taxes in the state.
This means additional tax returns for the business and owners. Make sure you check with your CPA before registering in a new state and make sure you understand how this fully impacts your taxes.
Don’t forget about insurance. These vary from state to state, but the 3 main policies to have on your checklist are:
- Workers’ Comp insurance
- Unemployment insurance
- Disability insurance
Most owners forget that workers’ comp also applies to remote employees.
States will require the employer to register workers’ compensation insurance in the state where the employee is physically performing services. States will also require that the employer register and remit unemployment insurance premiums based on the employee’s wages.
Failure to register, file and pay for these policies leaves you exposed to liability and heavy penalties.
Best practices is to connect with your insurance broker and make sure the new states get covered on all of your agency’s policies.
State by State
State by state the rules are going to change. Listing them out isn’t practical as they are constantly changing. See the exact steps you need to take in each state.
New States as a Strategy
If anything, trends have accelerated this year.
As you grow your agency, you’ll want to access the widest pool of talent at the most efficient cost.
If hiring in multiple states becomes a strategy for your agency, you may look to leverage a PEO such as Justworks or Trinet to ease the compliance burden of payroll. Remember that growth comes with added compliance… the not so exciting component of growth.
Make sure you are equipped with the right tools and partners to handle the complexities of having a remote team.
- A remote employee creates “nexus”
- Nexus means you must register in the state and pay taxes
- Review insurances to avoid heavy penalties