Even before the COVID-19 pandemic, the percentage of U.S. companies that allowed remote work was climbing steadily. During the pandemic, most companies that could enable remote workers did so for health and safety reasons. Now, companies are figuring out the right balance of hybrid, remote, and in-office schedules to best meet objectives. Supporting remote workers creates extra administration for payroll administrators as the remote workforce expands tax nexus for the company.
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In this article, we will highlight the trends in remote work, explain why remote work expands tax nexus, and how expanded nexus increases payroll administration and potential compliance complications. We will also outline how organizations can benefit from outsourced payroll to reduce administrative and compliance burden.
Remote Work Trends
Before the pandemic, about 6% of Americans worked primarily from home, according to the US Census Bureau. After two years of remote work due to the pandemic, current research predicts remote and hybrid work trends will persist. US Census Bureau household pulse survey data from late March 2022 showed 39% of U.S. adults substituting remote work for some or all of their typical in-person work. Gartner research reveals about 48% of employees will work remotely at least some of the time in the post-pandemic world.
Surveys show workers now base part of their employment decisions on flexibility and remote work, just as they consider salary and benefits. About three-quarters of employees say working from home makes them happier and is better for their mental health, according to Owl Labs State of Remote Work 2021 survey. Gallup Inc.’s latest research demonstrates “employees who work exclusively remote or hybrid tend to have higher levels of engagement (37% in both groups) than those who work exclusively onsite (29% engaged).”
How Remote Workers Can Expand Your Organization’s Tax Nexus
As we’ve seen, remote and hybrid work present many benefits to individuals and the organizations they serve. However, supporting a remote workforce creates more administrative work for payroll professionals.
According to an Owl Labs survey, “27% of workers relocated during the pandemic and 6% moved permanently.” When a remote or hybrid employee moves to a tax jurisdiction where your organization did not previously have a physical presence, it creates the potential to establish tax nexus. Because the employee is physically working within that state or municipality during their remote workdays, the tax authority could gain the right to tax your organization as an out-of-state (or “foreign”) corporation engaged in interstate commerce. You’d have to comply with all local laws and regulations, and this could have implications for business income taxes, gross receipts taxes, and sales and use taxes—not only at the state level, but also down to county and city jurisdictions.
In the initial waves of the pandemic, many jurisdictions waived nexus for businesses with a temporary presence of remote employees. Unfortunately, that temporary reprieve has ended. Now, organizations are responsible for understanding the tax implications of remote workers in different states and municipalities. Get help from tax experts like a CPA firm to understand whether your business could owe additional business income tax or sales tax due to remote workers in other locations.
The Remote Workforce Increases Payroll Administrative Burden
Employers are also responsible for understanding payroll tax requirements in each jurisdiction and performing the necessary administration to support correct tax withholding. In this age of the hybrid workforce, payroll departments will face increased administrative burdens. Some states require tax withholding even if someone works a single day in that state. Your payroll administrator needs to register each remote worker with the appropriate tax authorities in their location. Unless the remote employee has moved to a one of the nine states with no income tax, registering a remote employee usually means additional tax filing obligations and tax liabilities.
Administrative Errors Can Impact Corporate Compliance
Clerical and recordkeeping errors by your HR and payroll team can lead to compliance mistakes. Here are a few issues your payroll administrator should consider:
Unreported Employee Moves: In the new world of remote work, it’s critical that payroll administrators always know where a remote employee lives. Because most employees get paid through direct deposit, they might not think to inform their employer if they move. However, each move has the potential to change tax nexus and make your company subject to state specific wage and hour laws. Additionally, each move requires the employer to register the employee in the new tax jurisdiction. To prevent this compliance pitfall, remind employees that they must provide new address information every time they move. Give employees self-service features to update their own address information in the HCM system.
Failure to Register Employees in New Locations: It is the employer’s responsibility—not the employee’s—to register each worker for tax filing and withholding in all of the correct tax jurisdictions. Start with the applicable state’s Department of Labor. If you don’t have a very good system for keeping track of every employee’s move, as well as up-to-date payroll tax information for each potential jurisdiction, it is easy to drop the ball. Make sure any updates to employee addresses flag the payroll team’s attention, so nexus can be reviewed.
Incorrect Apportionment for Unemployment Insurance, Worker’s Compensation, and Disability: When an employee works part of the time in one state and part in another, earnings often need to be apportioned between the states for income tax purposes (or in a few cases, paid in both states for every dollar of earnings). Apportionment drives the calc
ulation of state taxable income and unemployment insurance and worker’s compensation using taxable income in their formulas. Get one wrong and you might also make a mistake in the other. With a hybrid workforce, it’s vital to know how many days/hours work was performed at the office location versus at home. Employers must be vigilant about time and attendance tracking with regard to locations.
Outsourced Payroll Reduces Compliance and Administrative Burden
Partnering with a payroll solution provider can alleviate many of the administrative headaches associated with supporting remote and hybrid workers. For example, Asure has a large team of payroll tax and compliance experts who maintain up-to-date federal, state, and local rate tables and file taxes on your behalf. Well-versed in multi-state payroll tax compliance issues, they ensure your employees are registered with the correct taxing authorities and can automate your withholding liabilities and tax filings.
Asure manages all payroll calculations, including overtime, tips, benefits deductions, garnishments, and more. Importantly, as a provider, Asure assumes the liability of managing payroll and HR data and filing taxes on your behalf. This means protecting your business from costly compliance mistakes.
Learn More About Tax Nexus and Multi-State Tax Compliance
Stay tuned: In our next post, we will provide best practices for avoiding common mistakes when managing multi-state payroll compliance for your organization. You can also learn more in Asure’s webinar, “Multistate Payroll Tax: Compliance with a Remote Workforce.”