My Employees Work Remotely. What Do I Do About Taxes?

In the COVID-19 era, remote work is more common than ever. This also means many former office-based companies are sourcing talent from outside their own home state. If you’re doing this, you’ll have to consider the tax implications of hiring out-of-state employees. Here are some issues to be aware of before moving forward.

Tax considerations for out-of-state remote employees

Employing remote workers allows you to build a diverse team of capable individuals who work well together and bring different strengths to the table. However, with this arrangement comes various tax implications that can be particularly burdensome to a business owner.

If you’re thinking about employing such workers, or you already do, here are some possible tax issues to consider.

You are subject to the tax laws of the employee’s home state.

Not only must you understand the tax laws of your own state where you do business, you’ll also have to consider tax laws of your remote employees’ home states as well. This creates extra work for you in terms of preparing and filing paperwork and withholding employee taxes, especially if you have employees in multiple states.

There’s the potential for double taxation.

Double taxation is another concern for out-of-state workers. Depending on the specific state laws that apply to you and your workers, remote employees may have to pay state income taxes in both their home state and the state where your business operates (for instance, this is true for out-of-state employees who work for New York-based businesses). This is something you’ll want to warn your employees about so they’re aware of what’s coming out of their paycheck.

You will need to stay current with your own state’s laws and your employee’s home state’s laws.

State tax laws are ever changing, and keeping up with even just your own can be difficult. But if you plan on employing remote workers, you must stay current with their home state’s laws as well. 

While it’s best to consult a tax professional with knowledge of out-of-state labor laws, you can check this list of state and local tax authority positions on tax matters related to telecommuting, as well as the websites for state and selected local tax authorities to begin your initial research.

Other remote employee considerations

While it’s important to consider the state and local taxes, employers of out-of-state workers should be aware of these other important items to consider:

• Insurance: You’ll want to familiarize yourself with state and local rules applying to issues like workers compensation, unemployment, and disability insurance. Generally, employers must register for and obtain workers’ compensation insurance in the employee’s home state, and register and pay unemployment in their home state as well. Otherwise, you can face liabilities and penalties. 
• Compliance with local labor laws: Labor laws also tend to vary from state to state, so make sure you understand which ones you must adhere to as an employer. Areas to research include rules about wages and hours, employment termination, non-compete rules, trade secrets, laws regarding sick and family leave, and more.

If you’re concerned about tax and labor law compliance for new remote employees, you could always hire 1099 contractors and avoid the headache. However, you will need to make absolutely certain that the worker you hire is properly classified and treated as a contractor and not an employee.

Have questions? Get help from a trusted CPA firm.

Working with experts is always a good idea when it comes to complying with state and local laws. If your business is concerned about its tax obligations for out-of-state remote employees, contact the experts at Miller & Company LLP for help. During your consultation, we’ll discuss your current situation and help you determine the best course of action for your business.

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