October 4, 2019 | 5-minute read (980 words)
Remote workers, whether they are employees and contractors who work from home but live in the same city as their employer or workers scattered across multiple time zones, are gaining in popularity. There are plenty of reasons more and more businesses are offering remote work options. For one thing, it can increase worker retention, give them a leg up in attracting talent by casting a much wider net, and reduce overhead costs (think office space, utilities, and potentially salaries).
But there’s no free lunch. These benefits come at the cost of greater complexity. Hiring remote workers means you have to be accountable to tax authorities in states beyond where your startup is located. That translates into being aware of, understanding, and complying with a host of different state tax registration, reporting, and withholding requirements plus filing deadlines and other considerations.
Read on for 4 things you should know about managing your state income tax obligations for remote workers.
1.What’s the Big Deal About State Income Tax Requirements?
Your workers are responsible for paying their state income taxes, but you are on the hook for withholding the required amounts from employees’ paychecks. Seems straightforward — what’s the issue? Chances are, you’re pretty familiar with employer tax withholding obligations and income tax rates for the state your business is based in.
But if some of your workers live or spend time working in other states than the one(s) your business operates in, you need to meet the withholding and reporting requirements of those states, in addition to your own. And each state has its own practices and regulations around tax policy and state income tax rates: from Pennsylvania and North Dakota’s low single-digit percentages to California’s hefty 13.3%.
Contractors are a different story. Since they aren’t “W-2 employees” you aren’t responsible for withholding income taxes for them. But be careful. If you’re tempted to just make all your remote workers contractors to avoid dealing with the complexity of taxes across different states, know that’s risky and unwise. States and the federal government have guidelines and tests for what makes a worker an employee versus a contractor. And there are penalties for getting it wrong. Also, even though you don’t have tax withholding obligations for contractors, you’ll still have reporting requirements, including for
Form W-9 and 1099.
2. Not All States Have an Income Tax
Great news, right? Here’s where it gets complicated. Nearly all states impose income taxes. The nine that don’t include Florida, Nevada, South Dakota, Texas, and Washington. If you have workers in one of the states without income tax requirements, you won’t have to deduct those withholding taxes from your workers’ paychecks. But you might still owe other types of taxes (for instance, unemployment and disability) to the state your business is based in.
If you have a critical mass of workers in a location other than your main site, the recent Supreme Court decision on state sales taxes for out-of-state companies, could also affect your company’s income tax liability.
3. States of Play
Is that it? No. States take different approaches to income taxes. The vast majority tax workers based on where they live. Some allow adjustments for days that workers are not physically present in the state. For instance, if your remote worker lives in another state, but spends time in your office or working at a location outside their state of residence, those earnings aren’t included in their taxable state income.
Confused yet? The bottom line is you’ll need to know each state’s rules in order to figure out the withholding rates to apply for your workers.
- Some states have reciprocity agreements with others or offer tax credits for the income taxes workers pay on out-of-state earnings so that workers only pay taxes in the state where they live;
- Some states tax residents based on where they live and where their employer is located; and
- Then there are states like California, that tax residents on any income they earn, wherever they earn it.
4. State Income Taxes, It Takes a Village
Dealing with multiple tax authorities, differing state rules and deadlines, and different categories of workers, is a tall order. It also has implications for how you run your business and financial systems from payroll to record-keeping to accounting and tax management. If that all sounds overwhelming when you’re focusing your energies and attention on scaling up your business and getting funded, that’s understandable.
Dealing with taxes — and getting them right — is important, and deserving of your attention. But just as you wouldn’t dream of going DIY on a complicated medical procedure, handling tax obligations across multiple states isn’t something to try to tackle on your own.
Bringing in an experienced tax accountant is key. Why? Because a good tax professional naturally understands the ins and out of multistate tax compliance. But it goes beyond that.
A competent professional can recommend solutions that help you avoid costly mistakes, penalties, and the other risks that come with getting things wrong. The right one though, has expertise working with businesses similar to yours. That means they bring even more to the table, acting as a trusted and valuable business partner which we recommend for anyone looking for tax services for startups. Having an expert to handle your business tax returns means you are freed up to focus on driving your business forward.
Do you have more questions about state income taxes for remote workers or want to discuss managing your tax compliance? Contact us to learn how we can help!
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