Business tax implications to consider with your remote employees

July 5, 2024

By Jennifer Faust, CPA/PFS
Principal

In today’s digital age, remote work has transitioned from a rare perk to a standard mode of operation for many businesses.

This shift to “work from anywhere” brings a plethora of complexities to navigate for your organization, but it particularly opens a business up to tax implications, particularly in the areas of sales and income tax nexus.

Sales tax nexus is the connection between a seller and a state that requires the seller to collect and remit tax on sales within that state.  

Traditionally, a physical presence such as a brick-and-mortar store, warehouse or office located in the state established nexus. However, as the workforce becomes increasingly mobile, the definition of physical presence has expanded to include remote employees.

The presence of remote employees in a state can establish a sales tax nexus for a business, even if the company has no other physical presence in that state. This means that businesses may be required to collect and remit sales tax on sales made to customers in states in which their remote employees reside.

The state’s rationale behind this is that the employee’s presence constitutes a business operation, thus creating a taxable nexus.

For businesses with remote employees in multiple states, the challenge of managing sales tax obligations becomes even more complex.

Each state has its own rules and thresholds for what constitutes a sales tax nexus, and these can vary widely. Some states may require tax collection based on a single remote employee, while others might have a threshold based on the number of employees or the amount of sales generated.

This underscores the importance of understanding and monitoring your company’s activities in each state in which you conduct business or have customers. 

Meanwhile, income tax nexus refers to the requirement for a business to pay income taxes in a particular state.

Income tax nexus can be established through physical presence or economic contacts within a state.

Like sales tax nexus, physical presence, such as an office or warehouse, traditionally has been the primary criterion for establishing nexus.

However, with the advent of digital commerce and remote work, the definition of physical presence has evolved.

For companies, this means that having a remote employee working in a state could create an income tax obligation in that state, even if the company has no other physical presence there.

This is particularly relevant in states that do not follow the precedent set by federal law.

The federal law in question provides income tax nexus protection for certain solicitation activities. Specifically, it stipulates that companies whose only business activity in a state is the solicitation of orders for sales of tangible personal property are not subject to the state’s income tax. This protection is designed to facilitate interstate commerce by limiting the tax obligations of businesses operating across state lines.

The implications of these developments are significant, especially as remote work continues to grow in popularity.

Businesses must be vigilant in understanding the potential tax implications of their workforce distribution and sales activities.

The rise of remote work has blurred the lines of tax jurisdictions, making it more challenging for companies to navigate the complex web of state tax laws.

To mitigate any unexpected tax liabilities, companies should proactively manage their workforce and sales activities. This includes keeping detailed records of where employees are located and where sales are made.

Additionally, businesses should regularly review their activities in each state to ensure compliance with evolving tax laws.

Consulting with a tax professional is highly advisable for businesses looking to navigate these complex issues.

Tax professionals can provide valuable guidance on state tax laws, help identify potential nexus triggers, and assist in developing strategies to manage tax obligations effectively. They can also offer insights into recent legal developments and how they might impact a company’s tax strategy.

This article was previously published in the Corridor Business Journal and the Tri-State BizTimes.