In the recent survey by Garner, three out of four chief finance officers said that they planned on moving at least 5 percent of their on-site workforce to remote working permanently. While recent events have certainly spurred the shift to remote working across the globe, the trend has been in play for some time. In 2019, studies showed that approximately 61 percent of companies worldwide employ workers with some aspect of remote working in their jobs. In the U.S., that number is now estimated to be around 4.7 million – or 3.4 percent – of the working population. Now, with more businesses making the move to online sales and remote working becoming a permanent trend, the questions of tax obligations and how the changes may affect filing that dreaded tax return are being asked.
What Is Your Business’ Tax Nexus?
A business’ tax nexus refers to its presence or connection to a place (typically a state or country). In other terms, it is used to determine whether your business has sufficient ties to be responsible for the payment of taxes in that location. This connection helps businesses to work out their income tax and sales tax liability. For sales tax, the criteria include having a physical location or property, or the presence of resident employees in the state. Additionally, the presence of resident work from home employees in the state also qualifies the business for in-state employee tax requirements, including withholding and income tax. Each state also has its specific filing requirements – also known as economic nexus laws – which stipulate the criteria and deadline for filing.
While some states like California and South Carolina released guidance on nexus obligations for employees working from home, these measures are only temporary. Therefore, for a business looking to shift to remote work for the long term, they must carefully consider the implications of having workers work remotely around the country. There is also the complication that may come with having several out of state employees – and the computing of business taxes when due. For this, businesses may find themselves looking for simpler accounting processes and tools, including tax software with screenshots and remote sessions for 24/7 help with tax queries.
Do You Have To Pay Tax For Your International Remote Employees?
A great perk of remote working has been the removal of borders when it comes to recruitment. As a result, businesses of all sizes can now connect with workers across the globe. When it comes to payroll and taxes, the treatment will differ according to whether your employee is classed as a contractor or a full-time employee. In the case of employees, the Society of Human Resources Management says most entities have to register a new local office or branch in the country of operation. In this case, they are required to abide by local tax regulations in the country of payment.
However, not every entity is willing to register a local office in other countries. If this is the case (as it often is with remote international employees), then income tax becomes payable if the employee is a tax resident. This relies on the employee’s length of stay in that country and whether that presents any conditions for social security and tax obligations. For instance, employees that reside in China for 183 days or more are considered tax residents and liable for an 8/20 percent employee/employer social security contribution.
Are There Multi-State Agreements In-Play?
Another tax consideration for businesses employing remote workers out of state is the presence of multi-state agreements to prevent double taxation. States like Ohio, Pennsylvania and 15 other states have reciprocal agreements, which allows residents of one state to work in another state without being penalized in both. Federally, two or more states are prohibited from taxing the same income. Each of these agreements differs according to state, so it is worthwhile checking the specific agreement for your business and employee location. For instance, if your business is located in Illinois and your remote employees are located in Iowa, Kentucky or Wisconsin, they would need to file a Form WEC to claim exemption from withholding tax.
There is still a lot more to be worked out when it comes to the taxation of a remote workforce. However, while some complications come with accounting for a remote workforce, the benefits are formidable. When it comes to the accounting side of it, making sure you have a well informed and suitable team of experts and tools in your business is the key to figuring out the maze.
