Nexus 101: How Remote Employees Impact Your Taxes

You’ve probably thought through operating in other states to some extent. If you start selling your product or service across state lines, you might need to register with that state and pay sales tax there, for example. Ultimately, though, your company’s selling activities might not be the only thing that establishes a nexus.

A remote worker located in that state could similarly establish a taxable nexus there. In other words, having an employee perform services for your company from their home in that state might be enough to subject you to that state’s tax laws. 

How a nexus can impact your tech company’s taxes

So, does an employee working from a different state establish a taxable nexus for your company there? 

Usually, the answer is yes. And while you might think this is a newer issue that you can work around because state tax laws aren’t yet firmed up, think again. All the way back in 2012, a remote worker/taxable nexus case went before the New Jersey Superior Court. In Telebright Corp. v. Director, New Jersey Division of Taxation, the decision validated that an out-of-state employer could be subject to New Jersey’s corporation business tax because just one remote worker resided and worked within state lines. 

In other words, courts can rule — and have ruled — that an employee residing in another state and working from home there is enough to subject your company to that state’s:

• Income taxes
• Sales taxes
• Gross receipts taxes
• Franchise taxes
• Use taxes
• Other state and local business taxes

Beyond that, the taxable nexus may also mean you need to comply with state regulations surrounding unemployment insurance, disability insurance, and workers’ compensation. 

As a best practice, you should look carefully into the laws governing any state where your employees want to work. Working with an accountant who specializes in state and local taxes can clue you into what might apply based on that state’s laws, how long your employee plans to work there, the type of work they do, and more.  

The right accountant can also help you determine the bill for that tax liability. Depending on the state’s apportionment laws — basically, how it divvies up your activity across taxing jurisdictions — you may not owe much. In some cases, an employee relocating to another state might not mean much more than the headache of some additional paperwork and some nominal tax payments. Understanding what would be required — both in terms of filings and in terms of payments — helps you make decisions about where your company will allow employees to work (more on that later). 

Employment taxes based on the employee’s location

Even if the employee working from across state lines doesn’t establish a sufficient nexus to subject you to, say, sales tax in that state, you probably need to consider income tax. Again, this hinges on state law, and it can get complicated. Sometimes, both the state in which you operate and the state where the employee lives will require income tax withholding. In other words, you could face double taxation. 

This issue is particularly murky right now because some states issued waivers or guidance protecting employers from taxation if employees worked in another state due to COVID-19. But those protections have already started to expire. 

Generally speaking, unless your state has a reciprocal agreement with the employee’s home state, it’s safe to assume that you’ll need to withhold state and local income taxes for the employee based on their location. So, yes, that does mean registering with the state and navigating their specific tax withholding and filing processes. Again, a good accountant can go a long way here to make sure you’re compliant while keeping this as hassle-free as possible. 

In some cases, your own state might also require income tax withholding for that employee, even if they’re technically working out across state lines. Your tech company and the applicable employee could be subject to double taxation.  

That clearly isn’t ideal for your company, and it doesn’t benefit the employee, either. That’s why tech companies should take two steps to prevent unnecessary complications and expenses. 

Controlling your tax liability

During the pandemic when remote work was the default, many employees operated under the assumption that work-from-home meant work-from-anywhere. Some moved to new cities, new states, and even new countries. It wasn’t uncommon for them to do so and not inform their employer, too. 

But as nexus waivers expire post-COVID-19, tech companies need to protect themselves and their teams by firming up some rules around remote work locations. Specifically, these two actions go a long way toward helping you — and your staff — avoid an unpleasant tax situation. 

#1: Make decisions now about where employees can work

Even if your company is comfortable allowing employees to work from just about anywhere, sit down to make some decisions about where “anywhere” includes. If your state income tax laws require you to withhold income taxes for every employee regardless of where they work, for example, you might choose to blacklist states that also require withholdings for remote employees.

To determine which states your company should okay for employees, also look at each state’s apportionment factor(s). 

Most states apportion taxes based on a three-factor formula, which means they look at your payroll, property, and sales in the state. Some states weigh those factors, while others consider them in equal measure. Still, other states apportion taxes based on a single sales factor, which looks exclusively at your sales in the state. Ultimately, understanding how the state in question apportions taxes helps you get an idea of what your tax liability might be if you allow team members to work there. 

If you plan to allow your employees to work from jurisdictions outside your company’s home state, work closely with your accountant to determine which other states should be on the table — and which your company chooses to blacklist. 

#2: Educate your team

Limiting employees’ options might feel like a fast track to company culture problems. Actually, though, you’re doing your employees a favor. Double income tax withholding hurts their take-home pay, and certain remote work could mean they have to file taxes in multiple states.

Don’t just publish your list of blacklist states and leave it at that, though. Instead, offer education around taxable nexuses and what they mean for your team. Helping them understand why you’ve made the choices you have makes a big difference. 

Plus, educating your team on this issue can save you from the hassle and expense that arise when employees move and don’t tell you about it. 

Ultimately, the taxable nexus issue is a complicated one. To see how it applies to your company based on where you operate and where you have employees, get in touch with our team.