With safety restrictions now being lifted as the COVID-19 vaccine becomes readily available and the percentage of the vaccinated US population is rising, the time has come for many employers to plan for employees to return to the office to work. Both employers and employees, however, are also considering the option of creating new and permanent remote work location arrangements.
In order to offer the option of remote working, employers must consider several tax and legal issues related to their remote work practices. In this alert, we have provided a general summary of the issues that employers should consider, but the rules will differ across jurisdictions, so we encourage employers to consult with counsel if they are planning to transition to long-term remote work programs.
A number of states, including Massachusetts, Pennsylvania, and New Jersey, have issued guidance relaxing the economic nexus requirements with respect to remote workers, but in most cases, the guidance is related to the pandemic and may be temporary. There is no unified system across all 50 states, and the majority of states have not addressed the remote working issues. In the absence of clear guidance from a state on these issues, we advise employers to consult legal counsel or an accountant on how out-of-state workers impact company tax obligations.
Employers may find that a remote workforce has the potential to create unexpected tax exposure in jurisdictions where such employers have little to no contact other than the presence of a telecommuting employee.
Tax Issues for Employers
Having an employee in a state may trigger foreign qualification business registration requirements. There must be a determination of the state requirements of what constitutes “doing business” with consideration of these factors:
- Type of business
- The remote employee’s functions in the state
- Number of remote workers in the state
- Length of time the remote worker will remain in the state
Generally, tax reporting and payment obligations for a business arise in a state where the business is considered to be “doing business.” Having an employee working part-time in a state can be considered sufficient contact or nexus with a state for a business to be considered to be “doing business” there.
In addition to tax filing and payment obligations, an employer may be required to qualify to “do business” in a foreign state once it has employees in the state. A business that is required to file or pay taxes in a state will usually, but not always, also be required to register to transact business in that state.
Doing business in a state will typically subject a business to the state’s income, franchise, and gross receipts taxes. Although some states have provided temporary relief in cases where employees have been forced to work remotely due to the pandemic, most states have not provided long-term relief from tax reporting and payment obligations with respect to remote workers.
The rules vary among the states regarding when the presence of employees in a state will be considered to result in sufficient nexus with a state resulting in subjecting a business to the state’s taxing jurisdiction. The Multistate Tax Commission has model rules that have been adopted in many states, pursuant to which nexus results if a threshold level of activity with respect to payroll, property, or sales is exceeded in the state, but some states have taken the position that the presence of a single employee may trigger nexus for tax purposes.
Once an employer has determined if there is nexus with a particular state, then it must make a determination of whether there is a filing and/or payment obligation. Generally, if nexus exists, an employer will have a filing obligation even if it does not have a payment obligation, and an employer may have a payment obligation even if its only contact with the state is the presence of the remote employee.
The types of tax liabilities that must be considered include:
- Income tax withholding, which is usually required where the employee provides the services, unless there is a “reciprocity agreement” between the state of residence and the state of work
- Income or receipts tax
- Sales and use tax
- Unemployment insurance, which is usually paid to the state where the employee performs the work
An employer is usually subject to the employment laws of each jurisdiction in which its employees work. Just one remote worker in a state may trigger a number of employment law compliance considerations, including:
- Employee classification (employee/independent contractor and exempt/nonexempt)
- Wage and hour laws, including minimum wage and overtime
- Reimbursement of remote work expenses
- Sick leave
- Family, medical, pregnancy, and COVID leave
- Disability and pregnancy accommodations
- Workers compensation
- Workplace notices
- Mandatory policies and training
- Expanded Equal Employment Opportunity protections
- Employee Benefits – Coverage Considerations
- Immigration compliance
- Business certification and licensing
In summary, if an employer is contemplating a significant change in the terms of employment for its employees including the option of remote working, a thorough analysis of legal, tax, and employment issues should be undertaken. This analysis should include a review of the compliance requirements in each area along with a cost-benefit analysis before implementing any changes in business strategy and employment policies. Employers will need to track the locations of their workforce and monitor guidance that is available in the states where they have remote workers to ensure that they meet all compliance burdens.