By Hooman Yavi
Many employers have shifted to a partially or fully remote workplace in response to the COVID-19 pandemic. This flexibility can lend itself to increased productivity and better worker retention. But as a growing number of remote workers are moving or living outside of the state where the employer’s offices are located, businesses should carefully consider the legal implications of an out-of-state workforce.
Where Do We Pay Taxes?
States impose taxes on companies that have a physical nexus in that state. Having even just a single employee working from home in a state is generally considered a sufficient nexus, subjecting the employer to state income tax, gross receipts taxes, and sales and use taxes in that state.
Furthermore, employers must pay state withholding taxes in the states where their employees work. If your company is based in California, but you have a remote employee based in Texas, then you must withhold income tax and pay state unemployment tax in Texas.
Critics argue that the PERM process requirements, such as advertising jobs in print format, already deviate from most companies’ standard recruitment efforts.
Which Employment and Labor Laws Apply?
Employers also need to comply with the state, county and/or municipal employment and labor laws where the employee is working. This includes wage and hour, non-compete, sick leave, family medical leave, and termination rules.
To comply with legal requirements in the states where their remote workers reside, employers must first file as a foreign entity with each state’s Secretary of State office. Filing the foreign qualification requires valid proof of good standing in the company’s home state.
Once your company files the foreign qualification and obtains a certificate of authority, you must comply with annual reporting and state tax requirements each year or risk having your foreign qualification suspended or revoked.
Workers’ Compensation Insurance
Employers are generally required to obtain workers’ compensation insurance and register with the relevant division in the state where their employees are working. For remote employees, this will include the state where the employee resides. However, for employees that commute from one state to another for work, their employer only needs to register for and obtain workers’ compensation insurance in the state where the employee performs services.
Employers must register with the relevant unemployment insurance administrator in the state where their employees perform services, and pay the unemployment insurance premiums to that state.
Failure to do so may expose the employer to liability, including penalties for noncompliance with the state’s unemployment insurance laws.
Group Health Insurance
Check with your provider to see whether your company’s group health insurance has state-specific insurance regulations.
Tax Considerations for Employees
Remote workers may be subject to double taxation, depending on the states where they live and work, or how long they plan to stay in the new state.
Many states have reciprocal personal income tax agreements. Remote workers that reside and work in two such states do not have to pay their employer’s state income tax. Other states give employees a limited tax credit for taxes paid to another state.
You may be able to avoid double taxation by limiting your visit in the new state. Short-term stays in states outside of your usual place of earnings may not be subject to state income tax. You should understand how long you can reside and work remotely from a specific state before you are subject to tax reporting requirements.
If these exceptions do not apply to your situation, you will likely be taxed twice.
For help managing legal compliance obligations for your out-of-state workforce, please contact your trusted Chugh, LLP attorney or send us an email at email@example.com.