By Alex Sneed
The rise of remote work has transformed the traditional office landscape, enabling individuals to work from anywhere in the world. While flexibility has advantages, it also brings new challenges and considerations, particularly regarding state tax obligations. As remote work becomes increasingly prevalent, employers must understand and address the state tax obligations to ensure compliance with the law.
State Tax Obligations for Employers
Employers play a crucial role in ensuring compliance with state tax laws. The first consideration for employers is determining their nexus with a state. Traditionally, nexus was determined by a physical presence, such as simply having a physical office or employees in a state. It has since changed to economic presence. With remote work and states’ adoption of the economic presence nexus standard, the application of nexus has become more complex and inclusive.
Employer Nexus in Remote Work Scenarios
An employer’s nexus may be established through various factors, including having employees reside in a specific state, conducting business in that state, or even selling to customers there. Employers should consult with an expert to understand the particular nexus rules and requirements in each state where they have remote employees.
Understanding Income Sourcing and Apportionment Methods
Another critical aspect of state tax obligations in remote work scenarios is determining how income is sourced and apportioned. Sourcing rules may consider factors such as where work is performed, where an employer is located, or where the customer is.
Apportionment methods divide a company’s income among different states based on a formula that considers factors that can include sales, payroll, and property in each state. Employers need to understand these methods and ensure accurate reporting and withholding of taxes.
Economic Presence as the New Standard
Economic presence refers to the completion of income-generating activities that give rise to a taxpayer’s liability. Under this standard, nexus is established with a state if the economic activity that generates the income reaches certain thresholds and occurs within that state.
Economic presence is being further refined into a factor presence standard which establishes the economic thresholds that must be met for nexus to be established. Relevant to remote work, a company needs only to have approximately $50,000 of payroll in a state to establish economic nexus. Not every state has yet adopted factor thresholds, and this leaves nebulous the interpretation and application of the economic presence standard.
As remote work becomes more commonplace, addressing state tax obligations becomes a critical consideration for employers. An experienced accounting firm can help employers understand their nexus with each state where they have remote employees and ensure accurate reporting and withholding of taxes.
