The pandemic has changed who we hire. In some cases it is about hiring contractors vs employees and in other cases it is about from where employees are located. In this article, we will focus on hiring employees in other states.
The remote boom resulting from the pandemic has opened new and unique opportunities to expand one’s labor pool. However, while there are benefits to doing so, one must be aware of any possible pitfalls and to plan accordingly to avoid unforeseen issues. Here are a few things to keep in mind before you decide to hire remote workers.
Employment status depends of Federal and state rules. Some states may not have any clear-cut rules, or may even have rules that conflict with your company’s home state regarding the classification of workers as an employee versus an independent contractor. On the other hand California has clear rules and regulations dictating who can or cannot be classified as an independent contractor within the state of California. It’s highly advisable to check the laws of the state of the worker’s residence, as well as engage local labor counsel for confirmation before making an offer to a prospective candidate See our posing “Employee or independent contractor and why it matters” for more information on employment status.
With a remote worker outside of your state, you may have created nexus between your business and the state of their residence. This is highly dependent on their employment status (see above) as well as the role that worker plays in the company. If the person is an employee for the company and either solicits sales or takes part in administration, there is a higher likelihood of creating nexus as opposed to if the worker was an independent contractor working on a support role.
Although the Multistate Tax Commission has created rules to add consistency to state definitions regarding which activities create nexus, not all states are in conformity and some states only partially conform. Furthermore, the payroll factor may not be the only apportionment factor affected. Depending on the worker’s status and role in the company, the revenues earned in that state may now be apportioned to that state.
The hiring of a remote worker may trigger increased compliance obligations for the company. An out of state independent contractor may only cause a company to issue a 1099 to the contractor, with the payment sourced to the contractor’s state of residence.
On the other hand, if the worker is an employee, the company will be responsible for withholding federal and state payroll taxes for the employee and file quarterly payroll tax forms as well as an IRS Form W2 at year end.
Depending on the worker’s role and the resulting impact on creating nexus where the work is performed, the company may also be obligated to file an income tax return with that state. In addition to income tax considerations for sales, companies also need to consider sales tax nexus. Depending on the good or service provided, sales may be subject to sales tax and require the company to both collect and remit sales tax and file a sales tax return. Depending on the jurisdiction and level of activity, this may be filed on either a monthly, quarterly or annual basis. Although sales tax has been a secondary concern in years past, the ruling on the Wayfair case by the Supreme Court has resulted in sales tax becoming a more significant issue.
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