The remote workforce has expanded as rapidly and as surprisingly as a tube of cinnamon rolls that just popped open, secretly unnerving anyone stuck holding the exploded tube. Employers continue to find ways to accommodate employees while also forging ahead towards a new normal, and the emotions and plans behind allowing folks to remain remote or bringing people back into offices are being digested. But one thing is universal for employers, regardless of this inflection point – taxation.
Upon completion of the Constitution, Benjamin Franklin waxed poetically about the durability of the document, concluding cynically that “in this world, nothing is certain except death and taxes.” So true, ol’ Ben.
Let’s dive into what tax implications all American employers with remote workers need to know.
Tax Implications for Companies With Remote Workers
Table of Contents
- How does remote work change federal tax implications?
- Who is actually considered a remote worker?
- What is the double taxation predicament folks are murmuring about?
- The “convenience of the employer” rule
- How remote workers are avoiding double taxation
- How do employers handle nomadic remote workers?
- Where it does get hairy for employers
- Staying ahead of the game
But before we proceed, we should note that you should consult a tax professional to help you understand your specific financial situation. None of this should be considered financial advice.
How does remote work change federal tax implications?
The good news is that this part is simple – having remote workers does very little, if anything, to change your company’s federal taxes. There are no special tax credits or tax penalties imposed federally based on where an employee resides.
This does not apply to offshore workers, however, as today we are only talking about your team members working within the United States.
Who is actually considered a remote worker?
It has long been typical for workers to live and work in different states, for example, people working in D.C. rarely live in the district, rather in Virginia or Maryland as it is much more reasonably priced, and commuting is normal. In other words, our government is used to handling workers that live in a state different from their employer.
That said, who is actually considered a remote worker?
If your company is paying employees on a W-2 basis while they work in a state other than where you are licensed to do business, that is a remote worker, according to the IRS.
If your company is paying folks on a 1099 basis, they are not considered a remote worker, they are classified as an independent contractor or freelancer.
Whether you’re a large firm or a tiny operation, knowing the differences between W-2 and 1099 team members is crucial.
What is the double taxation predicament folks are murmuring about?
If you’ve been on social media of late, you’ve probably seen people proclaiming double taxation. You’d think tea is about to be dumped into a harbor en masse as they discuss people who work across state lines from their employer.
For example, if your company is headquartered in New York and you have allowed all team members to work remotely, if one moves to Nebraska for lower cost of living, they may be subject to state income taxes in Nebraska and non-resident income taxes in New York.
It’s a serious challenge because all states have their own taxation structures. Even cities, counties, and municipalities can have their own taxation rules in addition to state and federal rules.
The “convenience of the employer” rule
That’s where the “convenience of the employer” rule comes in. It may feel like the pendulum of control has swung firmly to the side of employees, but employers certainly have an advantage in this one way.
The rule is such that an employee may be subject to the aforementioned double taxation if they have moved for their own personal preference or convenience rather than due to an employer mandating the move.
In other words, the employer doesn’t carry the income taxation burden for an employee’s residence preference.
This rule is not applicable in all states however, only the following five:
- Connecticut
- Delaware
- Nebraska
- New York
- Pennsylvania
Massachusetts adopted a temporary rule during the pandemic, and states like New Hampshire had considered litigation to do the same. Arkansas observed the rule during the pandemic, but the state governor ended the practice in 2021.
Typically, an employee in this scenario can file for a tax credit if being double taxed, but that credit can be denied under this rule.
How remote workers are avoiding double taxation
Remote workers are catching on and moving to states that do not observe the convenience rule:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
For employers that intend on keeping teams working remotely, spending recruiting budgets in these specific states will grant quite a competitive advantage.
How do employers handle nomadic remote workers?
If your company is paying remote workers via W-2 and has invited them to work remotely or hired them to do so, there is a chance that some will opt into the nomadic lifestyle.
Does this make your tax filings more complicated than filings for a standard remote employee?
Not really, that part is mostly up to the employee. And like federal workers living in Virginia but working in D.C., this is nothing new.
A nomadic scenario you might be familiar with is actors. These pros live somewhat nomadically and have to pay taxes if they’re in a certain spot for a specific amount of time (which varies by location). If they’re shooting a film for several months, even if they don’t own property but rent or stay in a hotel, they may still have to pay taxes to that city or state.
The IRS uses a 183-day rule to determine “permanent” residency, but that number will never apply to someone working remotely from their RV who is trying to get to every national park before 2025.
Therefore, we harken back to the “convenience rule” wherein an employee’s migratory methods are more on them than they are on an employer.
Where it does get hairy for employers
There are two scenarios that have complicated hiring for employers. First, the shifting laws surrounding disclosure of salary ranges in job listings has made some employers unwilling to advertise open roles in certain cities and states.
Regarding taxes, however, the big hiccup is that if your company has even a single employee living in some cities or states, it could prompt required registration for a sales tax permit, and the company would have to file sales tax returns according to that state’s schedule. County and city tax registrations and filings may also be required.
This kind of compliance is easy for large organizations that have entire teams dedicated to this, but can become cumbersome for smaller teams, which is why hiring out of state isn’t burden free.
Companies of all sizes are still navigating these waters and choosing which states they will and won’t hire from. There is ample opportunity for employers to stand out in recruiting by making clear their hiring practices, and explaining them – especially for those willing to add some extra compliance work to their standard operating procedures.
Staying ahead of the game
Staying ahead of the taxation game is critical – ask any billionaire how they got so rich, and you’ll find a common theme emerges regarding their maximization of tax advantages.
How can you get into the groove of staying ahead? Follow tax experts like the Tax Queen on social media so that taxation issues are organically hitting your feed and keeping you up to date without your having to seek out new information.
Know that potential employees looking to remain remote are preferring states that don’t collect income taxes. This will help your recruiting efforts immensely.
Most importantly, staying compliant with local, state, and federal governments may feel overwhelming, but hiring a tax expert that specializes in remote workforces is a lifesaver for your company.
