Does your company use remote workers? Are you a remote worker?
A business with employees who reside and work in a different state from the business’ home office, could face unexpected state and local taxes next year. Remote workers could also find that they will need to pay income taxes to more than one state on the same earned income.
New trends in remote work
The Pandemic is rewriting the rules on where employees have to be based. This means recruiting for the right person casts a much wider net. But hirer beware. When an employee is working outside of the state where the employer operates, it creates physical nexus. This means the business will have to register in that state and likely pay tax of some sort to that jurisdiction.
For example, a North Carolina (NC) company hiring an employee who lives in Florida, would have to incorporate the business in Florida! The business would then be subject to some degree of Florida income taxes. These could be gross receipts taxes, and sales and use taxes. City or county taxes might apply as well.
Temporary Remote Workers
For COVID-19-related remote work on behalf of out-of-state employers, some states have temporarily waived the creation of a business nexus for state taxes. Out-of-state employers, however, may still have to withhold state income taxes for remote workers residing in these states.
Local Labor Laws
Labor laws do vary from state to state so your employee handbook has to reflect those different laws and regulations. Examples of different laws often include overtime, workday length, breaks, family and sick leave, termination processes, and non-compete rules.
Always remember that labor laws apply to the state the employee lives and works in, not NC laws. Laws change frequently so update your handbook at least every two years.
States vary considerably in their requirements for Workers Compensation Insurance. All generally require coverage within the state that the employee resides and works. Ask your current Workers Compensation Insurance carrier for advice on which way to go for employees outside of NC. Some states do charge the employee a portion of the cost.
For remote workers the state where the employee is working will very likely require “local” insurance. The employer should register for and pay the unemployment insurance premiums for the employee.
Double-Taxing Remote Workers
For remote workers, there are some states where double taxation may apply – NY, AR, CT, DE, NB and PA. These states follow what is known as the “the convenience rule”. If an employee’s job is based with an employer in one state but they live and work in another state out of convenience rather than because the employer requires it, they could end up paying taxes in both states.
Keeping Track of Employees
While employees are responsible for their own tax situation, employers do have responsibility to make sure the business complies with all relevant state’s laws and taxes. All this does not preclude remote hiring – it gives you things to think about if you do.
Kate Wells, MBA. Azurite LLC – Fractional Chief Human Resources Officer
Kate is a veteran small business owner and HR expert. She acts as Chief HR Officer for small and startup businesses who need HR expertise without the employee overhead. Her greatest joy is in setting employees, and therefore the business, up for success. Knowledgeable in the ways of business and people she is a consultant who gets stuff done. Kate has two adult daughters, a lifetime sweetheart, and enjoys hiking, road biking, kayaking, reading, Improv, jigsaw puzzles, and building things with power tools.
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