It’s no surprise that remote work is becoming more and more popular. As an employer, the question that inevitably comes up is “Will remote workers save me money?” Short answer, it depends. As Dave Danic of Summit CPA Group says, “They can, but you end up investing differently (and sometimes more) to build a stronger culture and to foster team productivity and happiness.”
In terms of talent and flexibility, there are several advantages to a distributed or remote team. Summit CPA Group’s Adam Hale details a few:
Talent Acquisition: Not only can you expand your talent search beyond local geographic borders, but you might realize some tax savings along the way.
Talent Retention: Turnover comes with any business model, but remote companies have an option for keeping employees who decide to relocate.
Physical Location: In a remote environment, you have the freedom and flexibility to budget a variable per-person expense for getting together in person versus a fixed rent that you can’t shift should your revenue slide.
The Nitty-Gritty Tax Implications
Niceties aside, there are tax and financial implications to remote teams. Whether you’re fully remote, partially remote, want to retain a team member who’s moving or entertaining the idea of a new remote hire, there are several things that differ from your traditional brick-and-mortar business.
Hiring people remotely is confusing, especially when you get into multi-state taxation matters. Luckily, Summit CPA Group offers tips and tools to help employers venture into remote and distributed environments confidently.
As Dave says, each state may have different city taxes, county taxes, school district taxes, transit taxes and more, which creates thousands of different tax variations that can arise for remote employers. While it may be easy to push these off to a back burner, taking care of taxation issues on the front end is the way to go because they will eventually come back to haunt you.
3 Questions to Focus On
When it comes to distributed or remote teams and taxes, there are three important questions to consider:
What taxes am I required to pay?
Am I an employer in that state?
If I am an employer, do I hold or pay?
Question #1: How many employment-related taxes are there?
First things first, get a handle on the different tax variations based on location. Dave offers an example of someone wanting to move to California from your home state. Income tax, state unemployment taxes and state disability taxes vary from state to state, and local taxes introduce a whole new level of complexity.
Income Tax: As the employer, you have to withhold income tax and remit it to the state taxing agency.
State Unemployment Taxes: Paid by the employer
State Disability Taxes: In the event an employee is injured, he or she may be able to apply for disability benefits to the state rather than relying on a private disability insurance plan. This is a tax on the employer; however, as the employer, you may be able to recoup some of the cost from the employee.
Local taxes: Local tax can be both a withholding scenario or a tax that’s directly placed on the employer.
Question #2: Are You an Employer (in that State)?
Tax “nexus” is a legal term that refers to an company’s presence in a state and its responsibility for reporting and paying taxes. Most likely, if you have a telecommuting or work-at-home employee residing in a particular state, there’s a really good chance you have nexus. As you move into states with remote workers, there are certain conditions that can create nexus issues that require you to register and report (i.e., an office location, advertising, licensing products or delivering products in the state).
Question #3: What Do You Do with All These Taxes?
Looking at the two most popular taxes, income tax withholding and state unemployment taxes, withholding for work-at-home employees occurs for the state where the work is performed. If you have an employee moving from state A to state B, withholding will also switch from state A to state B.
Income Tax Withholding
In some instances, it gets a little muddy. You may have an employee who works and resides in different states (i.e., travels from state A to state B to work). In general, agreements will specify that you, as the employer, should withhold the income taxes on the non-resident employee’s wages only for the worker’s home state and not subject to the income tax rules of the state where the wages are earned. An example, if your business is based in Indiana, but you have an employee coming in from Ohio, you’ll withhold on Ohio wages and have an obligation to register there.
If available, Dave recommends using the state’s W-4 to offer more protection as you move into more states.
State Unemployment Tax
States don’t want you paying unemployment taxes to two different states at the same time, because they don’t want the same person claiming benefits in two different states. As an employer paying out those taxes, you’ll need to figure out which state to pay the taxes to. Take the four-part test by evaluating these four line items:
Localization of Service: The employee’s service is localized where they’re performing the service. So if their residency has changed, and they’re working from home, you’re going to pay the taxes to that new state. For an employee who wants to work in two different states an equal part of time, you look at the base of operations.
Base of Operations: If you do have an employee who wants to move to a new state for a few months, you’ll likely keep the unemployment taxes in your home state. Calling the Department of Workforce Development (or similar department in your state) can help clarify this.
Place of Direction and Control: This is used mostly for a travel salesperson who is always on the road.
Residence of Employee: If you can’t determine where to pay unemployment taxes based on the prior three points, the residence of employee can help clear things up.
Other Telecommuting Considerations
State tax research seems daunting, but there’s a simple tool Dave recommends to help surface information: payroll-taxes.com/state-tax. Other considerations include:
Convenience of the Employer: A few states such as Delaware, Pennsylvania, Nebraska and New York have “Convenience of the Employer” rules to prevent non-resident workers from reducing their liability by working at home.
Disability Insurance Carriers: Check your disability insurance carriers to ensure your insurance provider covers new states.
Registrations: Be careful that your registrations are up to date in new states and provide information to your payroll provider.
Financial Management & Remote Companies
Remote and distributed companies face a few different variables in addition to tax considerations. Adam outlines some things to keep in mind as you venture into or scale a remote working environment:
Equipment & Tools: Many organizations use annual tech stipends to help team members purchase and maintain equipment and office supplies. These stipends live on company balance sheets, so it’s important that employees provide receipts.
Coworking: In some instances, employees will want to work in a dedicated space such as a coworking location. While not a physical office, these satellites generate costs if the company is covering them.
In-person professional training, meetups & retreats: Most service-based businesses with a physical location spend about four and a half to five percent of their revenue on facility costs. With a remote team, most employers redirect those costs for an annual retreat and annual meetups (by team, departmentalized, etc.). Typical costs for these are about $1,500–$2,00 per person.
Q&A with Summit CPA
Have questions or looking for advice? Post comments below, or reach out to Summit CPA Group at summitcpa.net.
This article is for informational purposes only, and doesn't constitute tax, accounting or legal advice. For advice on how remote and distributed teams impact your business and unique situation, consult a tax advisor, accountant or lawyer.