This is because states have differing rules for sourcing income. In addition, under certain fact patterns, income can be apportioned to more than one state for state income tax purposes resulting in a form of double taxation. Other states apportion income based on the relative sales, property and payroll in a state – the latter two being affected by the presence of employees. This is because some states apportion certain types of income based on where the company incurs the costs of performance paid to generate that income. The presence of employees in a state can actually change how the company’s income is apportioned for state income tax purposes. Sourcing Income for State Income Tax Purposes In addition, those companies may have a withholding tax requirement in that state. Those companies may need to file and pay income taxes to that state. Those companies may need to start collecting sales tax in that state. Given this, companies that have remote employees should fully understand the tax implications of having a remote employee in a given state.

In addition, the company must file and pay state income tax on its income that is sourced to the state. The company must collect and remit sales tax on all taxable transactions sourced to the state. Having nexus in a state has several state tax implications. Most activities of remote employees go beyond the specific protections of Public Law 86-272. Public Law 86-272 restricts states from imposing income tax when a company’s presence in a state is limited to soliciting orders for goods, if those orders are approved and filled in another state. In addition, presence of a remote employee in a state will often mean that a company loses the protection of the federal Public Law 86-272. The New Jersey courts confirmed that this presence in New Jersey was sufficient to give that employer nexus in New Jersey – and expose that employer to New Jersey income tax. In that case, a Maryland company had one remote employee who lived in New Jersey and no other connections with New Jersey. In fact, a New Jersey court case decided ten years ago illustrated this. Supreme Court decision in Wayfair) that physical presence of an employee within a state gives a company nexus in that state. In other words, if a taxpayer has nexus in a state, that state can require the taxpayer to collect tax and pay tax.įor companies, it has been a long-time rule (even before the recent U.S. In brief, nexus is a sufficient connection between a state and a taxpayer that allows the state to impose its taxing jurisdiction on that taxpayer. Constitution, a State cannot impose tax on a taxpayer without some connection between the taxpayer and the state.

We’ll highlight some of the key issues with remote employees that we are seeing in our practice. In addition, it can be a challenge to comply with state income tax laws – both for withholding and for those employees themselves. While having remote employees is a growing trend, and is likely to continue in the foreseeable future, employees located in other states can have significant state tax implications for a company. State Tax Implications from Having Remote Employees In addition, Renee’s accountant had informed her that her company may have to start filing income tax returns in each state in which her employees worked – even though it had no other presence there. However, some of those employees were starting to grumble about having Nebraska income tax withheld from their paychecks – particularly those who would also have to file an income tax return in another state. Renee saw many beautiful locales through her web calls and was envious of employees in warmer locales during the winter. Now, 12 months later, her employees were truly a national group. Renee wanted to keep her employees together as a team and knew that retention in her industry could be difficult if she demanded they work from her Nebraska office. They wanted freedom to be able to work from anywhere and potentially even live in a different place. Remote Employees Can Have Significant State Tax ImplicationsĪll of her company’s employees cheered when Renee announced that they could work remotely.

Do i pay state taxes if i work remotely