Working from home has become the new norm for many workers. Even before COVID-19 forced businesses to send their employees home, there were around 4 million Americans who worked remotely for at least half of the week. And even now, with the country slowly getting back to normal, many companies are allowing those workers who wish to stay remote to do so — either part-time or full-time.
Remote work has many benefits for companies, including access to a wider pool of employee talent (regardless of location), reduced employee turnover, and cost savings. And many workers, forced to work from home for the first time due to the pandemic, found that there were advantages for themselves as well.
But working from home can also mean dealing with some major compliance requirements. These can impact everything from business taxes to workers’ compensation. Unfortunately, such considerations are sometimes a surprise to employers who don’t have an HR department or lack an understanding of the implications of having remote employees.
Here are some of the things you need to know about maintaining compliance with the laws and regulations that govern remote employees.
1. Payroll requirements (state tax withholding and unemployment taxes for remote employees)
If your employees work from home in another state, where do you withhold taxes? Payroll can get particularly tricky for employers who
- Are located near state borders
- Have employees travel to job sites in other states
- Have employees work remotely
- Are expanding into new states
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 State A but your remote employee works at home in State B, under the physical presence rule you are required to withhold unemployment and state taxes in State B, even if you don’t have a physical office there. But there are exceptions.
Some states that border each other have entered into reciprocal agreements related to allowing an employee who lives in one state but works in a neighboring state to have their withholding tax paid to the work state.
But in certain states the law is different. This may mean, for example, that remote employees may encounter double taxation — being subject to income tax in both the state they reside and the state in which their employer operates.
And what if an employee only works a few days at home (out-of-state) and the remainder at the office? Now, things get more complex. You (and your employees) will probably want to get the advice of a tax expert due to the complexity of this issue.
2. Foreign qualification
Foreign qualification may come into play if you have formed a corporation or limited liability company and if you have employees working in a state other than the state in which your corporation or limited liability company was formed (which is referred to as a “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 corporation or limited liability company 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 limited liability company 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 limited liability company 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.
3. Permits for your remote employees
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 have received audit letters and notices of delinquency from interconnected government agencies. Even though they are not technically operating a business out of the home, as more work is done off-site and the more independence remote employees gain, the lines become blurred.
Check with your employee’s local city or county zoning laws to see if a permit is required.
4. Tax nexus considerations
The term “tax nexus” is used to describe a situation when a business has a tax presence or is “doing business” 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. It is best to talk to your tax adviser to find out for sure.
5. Classification of remote workers
To reduce payroll taxes and other labor costs, it’s common for employers to want to classify remote workers as independent contractors. But it’s wrong to assume that a remote worker is an independent contractor simply because they work out of state or have some autonomy because they work from home.
To determine whether a remote worker is an employee or independent contractor, that worker’s daily activities are just one of the many factors that a court will consider. A court will also look at the economics of the relationship and whether the services the worker provides are integral to the employer’s business and the amount of judgment and initiative the worker exhibits.
Evaluating whether a worker is an independent contractor is a complicated and nuanced process. And different states use different tests in determining who is an independent contractor and who is an employee. It’s wise to consult an employment law expert to ensure your business doesn’t misclassify its workers and face possible legal jeopardy.
6. 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.
7. Workers’ compensation
Most states require that businesses provide workers’ compensation coverage for employees. 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.
8. Unemployment insurance
If at least one of your employees conducts business in a state, then you are generally required to pay premiums for state unemployment insurance. So, if your workplace is situated in State A but an employee or employees work from home in State B, you must generally register with the state unemployment office of State B. A failure to do so may bring penalties for non-compliance.
9. Hybrid employees
Not all employees work in one place — whether that be in the office or at home (or another single remote location). Some work in a combination of each. These are considered hybrid employees. And when hybrid employees work in more than one state, that can be particularly challenging when it comes to tax compliance.
Other hybrid workers may work from a variety of different locations and in several different states. While remote workers tend to be stationary, these hybrid employees are often on the move and must be continually tracked for tax purposes.
10. Properly document working arrangements
If you operate a multinational business and you have remote or hybrid workers outside the U.S., you may need to amend existing employment contracts or create new ones. The pandemic has seen several countries pass new telework laws. These require specific documentation for remote workers.
As you hire new employees, consider adding language to your offer letters and contracts of employment that clarifies working arrangements and expectations of new hires
Maintaining good standing requires constant attention, especially when you do business in multiple states. If you want to learn more about how to maintain your good standing, contact a CT Corporation representative at 855-316-8948 (toll-free US)
Supporting compliance services: