Skip to content

4 Crucial Tax Considerations for Your Remote Business

Written by prositesfinancialNov 17 • 2 minute read

Due to the COVID-19 pandemic, businesses experienced significant financial, management, and operational challenges. The sudden lockdown and stay-at-home orders forced many companies to close their doors and shift to a remote work model. Now, employers are weighing the options of returning to the office and working remotely, and some are adopting a hybrid model.

While there are certain benefits to the remote working approach, you need to be aware of the pitfalls as well. One critical consideration is the state tax liabilities that could arise when employees work from home or out of state. So, here are some critical tax considerations when dealing with a remote workforce.

1. Income Taxes

If employees work in the same state where they live and file taxes, they’ll likely have no additional tax implications for your business. But if your remote employees are no longer working from the state where your business is based, you could have new tax liabilities.

Although remote working arrangements do not impact federal income tax, state income tax will depend on the locations of your remote employees and company offices. If remote employees have moved out of state during the prior year, it could result in new tax burdens.

2. Tax Nexus

Working or living in a different state often results in “tax nexus,” a term used in tax law to describe when a company has a tax presence in a specific state. Tax nexus refers to the connection between the entity paying or collecting the tax and the taxing authority.

For a business, having a physical presence is the key determinant for tax nexus, so having employees located in different states may result in additional tax obligations. An employee’s remote home may be treated as an office premise, subjecting your company to tax nexus in that state.

3. Dual Residency

Many states define a “resident” as a person who is in the state for reasons other than a transitory or temporary purpose. States typically consider your “domicile” to be a permanent home to which you intend to return whenever you’re absent from the state.

In most cases, if you spend over 183 days in the state, you’re considered a statutory resident. If your employees relocated to a different state during the COVID-19 pandemic, that threshold could be quickly approaching.

After the 183-day threshold, your employees may qualify as dual residents and be subject to dual taxation. As things stand, many states claim the right to tax your income if you’re considered a resident and domiciled in the state.

4. Job-Related Expenses Incurred by Remote Workers

Certain states require employers to reimburse employee expenses related to remote work. Be sure to check your reimbursement policy to ensure it aligns with the laws in the states where you operate. Employee salaries are typically fully taxable, but reimbursements may be tax-free if they meet certain criteria.

Weighing the Options for Your Company

As your business evaluates whether to have employees return to the office, continue working from home, or adopt a hybrid model, it is imperative to consider these crucial tax consequences. Depending on your specific needs, the tax ramifications may be significant and require proper tax planning to manage effectively.

Ready to make the
jump to better finances?

Click here to access our financial guide
and start practicing better habits for life.

%d bloggers like this: