Remote employees impact tax considerations for businesses

March 19, 2024

By Jennifer Faust, CPA/PFS
Principal

In today’s digital age, remote work has become increasingly common. However, this shift brings with it new 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 established nexus. However, the landmark 2018 Supreme Court case South Dakota v. Wayfair expanded the definition to include economic and virtual contacts, known as “economic nexus.”

The Wayfair case set precedent for states to establish nexus based on the volume of sales or transactions within the state, a concept known as “transactional nexus.” Under these rules, if a company exceeds a certain threshold of sales or transactions in a state, it may be required to collect and remit sales tax, and possibly income tax, in that state.

The specific thresholds vary by state, but they often involve hundreds of transactions or tens of thousands of dollars in sales.

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. However, unlike sales tax, not all states conform to the economic nexus standard for income tax purposes.

For companies, this could mean that having a remote employee in a state could create an income tax obligation in that state.

This is particularly relevant in states that do not follow precedent set by federal law. This law provides income tax nexus protection for certain solicitation activities, meaning 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.

However, some states have enacted laws that impose income tax obligations based on economic nexus, which could be triggered by the presence of a remote employee.

In conclusion, it’s crucial for businesses to understand the potential tax implications as remote work continues to grow.

Companies should proactively manage their workforce and sales activities to mitigate any unexpected tax liabilities. Consulting with a tax professional can provide valuable guidance in navigating these complex issues.