Telework, while enabling many industries to attract and maintain the best talent, also expands the number of states where company employees are present. This dynamic not only complicates state and local tax compliance but also increases the tax-related burdens for corporations. It’s essential to have a comprehensive understanding of the potential tax implications when having teleworking employees across different jurisdictions. Ensuring compliance from the get-go is invariably less expensive than having to afford costly audit defenses further down the line. Companies should keep a close eye on nexus, business and payroll taxes, sales taxes, and other tax-related concerns when considering where and how to offer telework benefits to employees.
Nexus is a term that signifies a sufficient connection between a taxing jurisdiction and the business it seeks to tax, to successfully impose tax. State governments maintain that a business of substantial size should file income tax returns in any state where it has customers. Where employees are physically present, very few exceptions to nexus have been established. Public Law 86-272 provides one such exception, which restricts a state from imposing an income tax if the only activity of the non-resident in the state constitutes solicitation of orders for sales of tangible personal property. The Multistate Tax Commission has provided guidelines on how to apply this protective measure.
Even if a company is shielded from other taxes, payroll taxes still apply to teleworking employees. State unemployment tax and income tax withholding will be imposed at the very least. Each state features a unique set of taxing structures, potentially incorporating additional payroll-related taxes like state disability, employment training, and local income taxes. For compliance with state income tax withholding requirements, the employer must have the capability to track where employees are working. Income tax withholding generally abides by the employee’s physical location. States including New York employ the “convenience of the employer rule”, requiring income tax be withheld from employee wages unless the employee is working for a bona fide office of the employer in another state.
In imposing business income tax, states generally target businesses that employ individuals within their state, although some could provide unique exemptions—for example, if the employee is only performing back-office type functions that do not contribute to establishing or maintaining a market within the state. Also, businesses must be mindful of other forms of taxation including sales tax (some states also subject services to sales tax), net worth, business license, and minimum taxes, all of which could apply in any given jurisdiction and be factors to consider when hiring a telework employee.
Link to the original news: Bloomberg Tax.