COVID-19 gave new insight into how quickly a company could move to a remote workforce. As many employers have found, the remote workforce has some advantages such as a larger employee talent pool with state lines no longer a boundary. However, what companies do not always realize is the compliance and/or tax issues that could accompany this type of workforce.
There is an impact on how employers manage different compliance issues in other states from payroll taxes, business taxes, state regulations to workers’ compensation.
Below is a brief overview of some of the rules to keep in mind when hiring in a new state.
01 Payroll Requirements
If your employees work remotely, out-of-state, where do you withhold taxes?
As a rule, employees pay taxes to the state in which the work is performed (known as the physical presence rule). For example, if your head office is in Indiana, but your remote employee works at home in California, you are required to withhold taxes in California.
If your employees work remotely, out of state where do you pay unemployment insurance? Again, this is subject to the physical presence rule.
There are some exceptions to both rules, Reciprocity. This is where states have agreements with each other allowing an employee who lives in one state but works in a neighboring state to have their withholding tax paid to the work state. Or an employee could become subject to payroll withholding in both the state where they live and then if they work part-time in another state.
Some states have suspended some of the normal rules during the Pandemic.
02 Occupation Permits
Many municipalities require that home-based workers obtain a home occupation permit. Certain states have very strict permitting and licensing requirements – especially at the local level. You may run into issues if you are paying payroll taxes in these states and do not have any local-level, home occupation permits. Companies are starting to receive audit letters and notices of delinquency from interconnected government agencies. Even though they are not technically operating a busines out of the home, as more work is done off-site and the more independence remote employees gain, the lines become blurred.
Please discuss with your legal and tax advisor for more information related to the Occupation permit requirements.
03 Foreign Qualification and Tax Nexus Considerations
Foreign qualification may come into play if you have formed a corporate or a limited liability company and if you have employees working in a state other than the state in which your corporation or LLC was formed (this is referred to as “Foreign” State). Depending on your type of business, what your remote employee is doing, how many remote workers are in a state, and how long they will be doing that work in the foreign state, you may need to “qualify” your corporate or LLC in that state.
Foreign Qualification is the process of applying for authority to do business in a state other than the one in which the corporation or LLC was formed. You may need to qualify if, for example, you have a physical presence in the foreign state, or if you routinely accept orders or execute contracts there. In addition, once qualified, the corporation or LLC will have other compliance obligations such as having to designate and maintain a Registered Agent and file an annual report. A Registered Agent is a person (which can be a corporation as well as an individual) with a physical address in the state who can receive legal documents on behalf of your business.
Tax Nexus is used to describe a situation when a business has a tax presence or is “doing busines” in a state other than its primary physical location. Depending on what your remote out-of-state employees are doing, your business may become subject to that state’s sales, income, or other tax laws. If your employees are working out-of-state temporarily due to COVID-19, the state may waive the remote worker nexus rules. It is best to talk to your tax adviser to find out for sure.
It is important to maintain good standing in each state and this requires constant attention. Working with your tax advisor will be important to keep your business protected.
04 Workers’ Compensation
Workers’ compensation is required in most states. But what if a remote worker is injured on-the-job? In most instances, they can claim benefits, but state laws differ on what constitutes a work-related injury. To avoid any confusion, set clear guidelines around the job duties and work hours of your remote employees so that you can more easily separate truly work-related claims.
For clients who participate in Tilson’s Worker Compensation Insurance Plan, Tilson and the carrier will be able to assist if this situation arises.
05 Privacy and Data Security
As you add remote employees to your workforce, your network endpoints and potential avenues for cyber attacks increase. Mobile devices, wireless networks, and even inadvertent disclosure of data in public spaces all expose your business to unwanted vulnerabilities. Ensure that you have security policies and guidelines in place to prevent data loss. Educate yourself on cross-border data transfer laws and the implications of sharing information about global customers with home office workers.
Tilson provides a cloud based HRIS solution for employees and employers to maintain the privacy of the employee information.
Tilson Is Here to Help
The above isn’t a comprehensive list of all the legal requirements you need to consider, but it should give you an idea of some of the things you’ll need to account for when hiring employees in a new state.
Is your business protected and up-to-date on the latest regulations and reporting practices regarding HR Compliance? Talk to Tilson today on how we can manage and assist you in mitigating risk for HR.