When the pandemic first hit, many businesses were forced to transition to a remote working model for safety reasons. And many of those remote employees decided to move away from their “home state” for a variety of reasons. Now, businesses are starting to transition back to the office, with 50% of leaders saying their company already requires or is planning to require a return to in-person full time this year, according to a study from Microsoft.
Whether you decide to bring your employees back to the office full time or just part time, what are the tax implications you should consider? Please note that this blog post won’t get into the state tax withholding, worker’s compensation or other payroll tax matters related to the employee directly. We focus here on how employees may create nexus (and filing responsibilities) for both state sales tax and income tax.
Taxation Issues Created By Remote Workers
Before we discuss the return to the office, it is important to understand the tax implications for business owners with remote employees in different states. We recommend checking out our past articles on the topic where we share detailed updates, but in short, remote workers who live in a different state than they work can create “nexus,” which is the amount of contact from a company needed in a given state in order to be obligated to collect sales tax in that state or to be subject to income tax or gross receipts type taxes. When we talk about employees or offices in a state, we’re talking about creating a physical presence nexus with a state. That’s important, because once nexus is deemed to be created, companies need to examine their filing requirements. For sales tax, it may require registration for sales tax, collection of the tax, remittance and the filing of returns. From an income tax perspective, companies need to review how to source income and then file income tax returns.
During the pandemic, some states decided they would not assert nexus on companies with short-term situations, while others waived nexus just for a certain period of time. Now that businesses are returning to the office, employees may be moving back to their business’s home state. How does this affect the nexus your business may have reached in a particular state? Do you just get to leave the state from a filing perspective once your employee comes back “home”?
Back To The Office: Tax Liabilities
One of the questions business owners may be wondering is how long until they can deregister and stop collecting sales tax in a state where their remote employee used to live?
As with most sales tax requirements, the answer varies by state and is subject to change.
Some states, such as New York, Tennessee, Vermont and Virginia, keep it simple — when the condition establishing the physical nexus in a state ends, a company’s sales tax compliance obligations also end.
Other states are not as easy to manage. About 35 states have trailing nexus policies, meaning they have an obligation to remain registered and report taxes in a state for a certain period of time, even after the established nexus ends. The amount of time that trailing nexus lasts varies by state. In some states it may just be for the rest of the calendar year, in some for another full year, and others don’t have a designated period of time.
To learn more about specific trailing nexus requirements in your state, check out our blog article linked here.
Still Have Questions About Tax Liabilities Created By Your Employees? Contact Monika Miles & Team, Miles Consulting
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