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There was a once time when offices and in-person collaboration were an integral part of doing business.
But that was before the COVID-19 pandemic forced businesses around the world to abruptly shutter their offices and implement remote work policies for employees.
In the years since then, a growing number of companies are choosing to make remote work permanent for some or all of their employees. In some cases, employees can also choose to work remotely from other states or countries.
Though the rise of remote work can help businesses retain and attract employees, there are a number of tax implications that you and other key decision makers should consider.
“Quite frankly, nearly every business in the world is dealing with this issue in terms of what we sometimes call ‘The Great Migration,’” Pilot’s Senior Tax Manager John McManus said in an
AMA webinar on startup taxes
. “Employees who might have been hired in one state have migrated around the country and, in some cases, to foreign countries. The ability of people to be mobile and live and work in other states has dramatically expanded over the past two years.”
Registering Your Business in New States is Key
If you have employees who moved to other states or are thinking of hiring people who live in other states, your business should be prepared to handle any payroll and income tax complexities that may arise.
More specifically, a payroll services provider can help your company get set up and registered in the states where people will be employed, as well as “deal with the ongoing taxes that employees bring,” McManus said.
“If someone who’s being hired is going to be an employee rather than a contractor, they're going to expect that the company is going to be able to deal with payroll taxes in that person's home state,” McManus said. “Rightly or wrongly, they're going to have that expectation.”
For example, tax withholding for income tax purposes will vary based on an employee’s home state. Payroll service providers can also help your company file unemployment taxes and determine whether you need to pay additional taxes or fees as an employer.
“There’s the online process of initiating (business) registration and getting lined up to withhold (taxes) in a new state, but there’s also the turnaround time that states need,” McManus explained. “The state taxing agencies have really been completely overwhelmed by the amount of migration that’s taking place and the amount of new businesses that are registering across the country, so book in as much time as you can to initiate that process of dealing with payroll taxes in a new state. There's only so much that you can do, and the states are kind of on their own timetable.”
Remote Employees in Certain Cities Can Affect Your Tax Filings
You should also determine whether your company may need to file income and payroll taxes in those cities where employees live. For instance, New York City assesses its own taxes on employees and at the income tax level for businesses.
“Wherever there are employees, you're likely to have income tax and payroll tax filings in that state and then sometimes in the city where people are located,” McManus said. “That happens less often at the city level, but it does come up particularly for cities in California, New York City, and some cities in other scattered states.”
Since remote work policies can have far-reaching impacts on your business, it’s important for you to consider potential tax implications and hold discussions with current employees and potential hires about where they plan to work.
“There's an opportunity here to really have some good dialogue with employees in terms of whether they are temporarily moving to a state and then moving on relatively quickly or permanently setting up residence in that state,” McManus said. “Being able to sort of understand that scenario can actually have an impact on your tax filings.”
Looking for answers to other common tax questions, such as whether you need to file a Form W-8 if vested equity is used to pay foreign contractors and what kind of tax obligations a pre-seed and pre-revenue startups may have? Check out our AMA webinar on startup taxes for answers to these questions and more!