PART 2: Regulatory Requirements Attached to a “Wandering Workforce”
As the remote workforce in the U.S. continues to grow, many employees are capitalizing on their newfound flexibility and moving away from their home office—in search of a new hometown that offers lower living expenses, a better quality of life, or that brings them closer to family.
Many of these employees, however, are unaware of the federal, state, and local compliance hoops companies jump through to do business in the U.S. – and this complex labor-related regulatory framework becomes even more complicated with a geographically dispersed workforce.
“With employee demands for greater flexibility, including working out-of-state and out-of-country, tax becomes a serious and central issue for organizations,” says Richard Tonge, a principal for Grant Thornton Global Mobility Services in the company’s “State of Work in America report: Assessing the state of American workers.” “Even a small percentage of employees working out-of-state, or out-of-country could trigger significant corporate and employer tax risk and challenges the sustainability of an organization’s hybrid working model.”
“With employee demands for greater flexibility, including working out-of-state and out-of-country, tax becomes a serious and central issue for organizations." - Richard Tonge, Grant Thornton Global Mobility Services
In addition to paying wages and fulfilling federal payroll tax obligations, employers are responsible for remitting state taxes, such as income, disability, and unemployment taxes, and obtaining workers’ compensation coverage in states where employees work. These can vary significantly from state to state and may also include fees or taxes in cities and counties when employees live or work within their jurisdictions. For these reasons—and many others—it is imperative that your remote workers report changes in residence, particularly if they move out of state—or even out of the country.
Organizations with a hybrid or remote work model should also explore how factors such as “economic nexus” and “apportionment” impact their tax obligations (explained below), as well as other compliance mandates in the areas where their remote workers live (and work.)
What is Nexus?
Nexus generally refers to the nature and frequency of contacts that an out-of-state company must establish in a state before it becomes subject to that state’s tax laws and jurisdiction.
For example, a company is generally considered doing business and subject to a state’s income tax laws if the company has employees working in the state, but rules vary.
According to the CPA Journal’s “Tax Implications of COVID-19 Telecommuting and Beyond” by Mark Klein, Joseph Endres, JD, and Katherine Piazza, JD, nexus can be created by a company’s:
- physical presence,
- factor presence (sales, property, or payroll of a certain percentage or amount), or
- economic presence (value or frequency of transactions in a state).
“Many states have adopted an economic nexus factor presence standard—meaning the state will assert nexus on a taxpayer if its sales, property, or payroll in the state exceed a certain monetary or transaction-based threshold,” states the article. “With the nexus threshold so low, most states have said that the presence of one to six telecommuters in the state would give rise to an income tax filing obligation for an out-of-state company.”
Some states enacted “nexus waivers” during the COVID-19 pandemic that exempted companies from paying certain taxes if a remote employee was working in the state solely due to the pandemic. However, many of those waivers have since expired.
To maintain compliance in all states where your company has remote workers, you should determine the relevant state’s nexus standard and the corresponding income taxes, gross receipts taxes, sales taxes, and local business taxes that your company is obligated to pay. Failure to abide by a jurisdiction’s tax rules can result in penalties and interest.
Apportionment and State Income Taxes
Apportionment is the assignment of a portion of a corporation’s income to a particular state to determine the corporation’s income tax in that state, according to Thomas Reuters’ “What is state tax apportionment and how do you calculate it?” The state(s) in which your business has a remote workforce presence determines how much of your earnings result from business done in that state so it can charge you the right amount of income tax.
There are exceptions. S (Subchapter) corporations, limited liability companies (LLCs), and partnerships typically are not required to pay corporate income tax because individuals in the business pay state tax on their income. That leaves C corporations—considered taxable entities—as the only type of business that pays state income taxes and, therefore, subject to apportionment.
State apportionment rules vary, but most use one of three apportionment formulas:
- Three-factor formula: Accounts for the percentage of a company’s payroll, property, and sales based in the state and then divides that number by 3 to come up with the percentage of income the state can tax
- Single sales factor formula: Bases taxes solely on a company’s sales within the state
- Three-factor formula with a variable sales factor: Considers payroll, property, and sales, but it gives extra weight to sales
Employment Tax Withholding Obligations
An organization’s employment tax withholding obligations include federal income tax and the employees’ share of Social Security and Medicare taxes (FICA taxes). Your company is also required to withhold state disability tax, if required by the state, and state income tax for the state in which services are performed—except for those without a state income tax, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
If you have remote workers, it is essential to know where they are working so that you properly adhere to corresponding state tax-withholding requirements. Generally, most states rule that the employee's physical presence dictates where tax is due.
"Organizations need to talk with leaders, managers, and employees about legal tax reporting requirements, writes Jason Walker and Rey Ramirez in Bloomberg Tax's "Six Key Considerations for a Successful Remote Work Strategy." "In some cases, companies may need to establish a new legal entity to be an employer in that location. For this reason, it is crucial to know where the worker's physical presence is to accurately withhold and remit state taxes and avoid costly tax penalties."
What if an employee moves out of the country?
This article focuses primarily on employees who move to a different location within the boundaries of the United States. But what are your responsibilities if one of your employees decides to move abroad or become a “citizen of the world” and move from country to country?
In addition to tax requirements, your business will need to register with the government(s) of the countries in which your employee resides—to officially conduct work there. You must also submit to the country’s tax structure, which can have a significant impact on your bottom line—particularly in tax-heavy countries such as France or Denmark.
It's not a simple thing to emigrate to another country, either. Your employee will be required to apply for a work visa—which will need to be sponsored by your organization. And the country’s labor laws will then apply to your organization—likely impacting the way in which you can manage your employee and/or the work they do.
Best Practices: How to Ace Remote Work Compliance
Whether you open an additional location or employ remote workers in another city, state, or region, your business must comply with local and state employment laws and regulations.
“Companies that operate in multiple locations are subject to expanding financial and legal compliance requirements,” says G&A Compliance Manager, Kelley Zanfardino. “These can each add significantly to the cost of doing business outside of your home location, and the benefit of an expanded workforce must be weighed against the cost it presents.”
These recommended best practices can help you manage remote workers while adhering to applicable labor laws and tax regulations.
- Register with Local and State Agencies: If you have not already, register your company with all local and state tax agencies in which you have employees—whether it's a full-scale office location or one remote employee. Also, make sure you apply for and obtain all in-state licenses and certifications required by your business' – or remote worker's – profession. Note: Some states limit the number of out-of-state hires who can be licensed in that state, and some require remote employees to have a home occupation permit.
- Comply with Local Workplace Regulations: States have varying laws that govern workplaces in their jurisdiction, such as minimum wage and overtime laws, required minimum meal and rest periods, and payday requirements (how often employees must receive a paycheck). Your business must comply with these regulations, so make sure to brush up on them before doing business outside of your home state.
- Review Your Tax and Withholding Obligations: Employment tax laws vary by state and even by city, so become familiar with local requirements. Likewise, workers' compensation and unemployment insurance programs are run by state agencies, so you need to be familiar with these obligations. Determine the relevant state's nexus standard and the corresponding income taxes, gross receipts taxes, sales taxes, and local business taxes that your company is obligated to pay.
- Document Your Policies and Procedures: If your company does not have a hybrid workplace policy, create one—or review and modify an existing policy—to reflect your long-term hybrid workplace strategy. Ensure that it is all-inclusive and incorporates guidelines and procedures for employees working at the workplace or in remote locations. Incorporate financial and regulatory policies and practices you will follow to ensure your company operates effectively and legally within the laws of local and state jurisdictions in which you employ workers, and make sure your hybrid workplace policy is reflected in your employee handbook.
- Work with a Team of Employment Experts: Managing a remote workforce can be a complicated and involved process. Consider working with a professional employer organization (PEO), which can help you navigate the complexities of a hybrid workplace model and support a remote team. G&A Partners has HR professionals who understand the nuances of multistate compliance, and we can help you keep your organization compliant—everywhere you have a work presence.
Coming soon! PART 3 -- Employee Engagement: How to Create Balance and Build Bridges in a Hybrid Workplace
Missed PART 1? Find it here.
How G&A Can Help
G&A Partners offers access to HR experts with years of experience helping businesses develop their employees, improve their workplace cultures, implement new HR processes and procedures, and more. Schedule a consultation with one of our trusted business advisors to learn more.