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Taxes on Remote Workers

The COVID-19 pandemic has shifted the way society works, making remote work far more familiar and commonplace. Remote employees have the opportunity to work from the comfort of their own homes, local coffee shop, or even on a beach vacation. This allows employers to attract workers from across the nation. While this flexible work schedule seems ideal for both the employer and employee, there may be complications arising from the remote arrangement that neither employers nor employees have anticipated, including issues involving payroll taxes.

Tax laws vary state by state; however, many states require a compliance with their payroll taxes even if just one employee of an out-of-state business is working in the state. This becomes a problem for businesses that have employees working in a different state than the location of their headquarters. For example, an employee who lives in Michigan could work for a company whose headquarters are in California. Depending on tax laws in both of those states, the employee could end up responsible for owing taxes to both of those states. Additionally, employers would have to withhold taxes for each state.  This creates a potential unanticipated pitfall for both employees and employers and could result in tax penalties for failure to properly comply with payroll tax and withholding rules.

Aside from the obvious financial burden created by this compliance issue, this can harm overall business by deterring the perfect candidate from taking on a remote out of state position.  Companies may need to search for and hire a local candidate who is not as fit for the job, just due to the cost of a remote employee being so heavy.

There are a couple of solutions to this issue to this issue that may be forthcoming. One is a reciprocity agreement between states whereby only one state’s tax rules would require compliance. Some states do already have these agreements with state-specific preconditions, other states do not. Consistency across the U.S would create an exception for a large percent of remote workers. Another solution is for each state to change their income withholding rules to provide an exception for businesses who have a limited amount of remote in employees in other states. If the remote worker threshold per state was at a set number, this would make it clear to business and their employees, when and if they would have to comply with a particular state’s tax laws.

While there are possible solutions, this does remain a prominent issue that employers and remote employees need to be aware of as more and more employers seek to utilize remote employees.

Cooper & Riesterer is here to help businesses and employees be proactive in the constantly evolving employment landscape. For assistance in these complex matters, please reach out to Jennifer Gross at [email protected] or any of the attorneys at Cooper & Riesterer, PLC.

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