Starting up remotely? Keep these labor laws and tax guidelines in mind
You don’t want to be doing a great thing for your business -- finding the right talent in the right location -- and then be hit with a penalty because you didn’t properly register an employee.
When it comes to remote employment, employees and employers both face a plethora of benefits and pitfalls. While the cultural pros and cons have been covered, considerations from a setup and maintenance standpoint largely haven’t been addressed. There are important legal and tax implications to keep in mind when it comes to a remote workforce.
Virtual teams existed well before COVID-19, but over the last two years, employees turned not being able to go into an office into a benefit by moving out of their employer’s state. For startups, hiring out-of-state employees became common, as remote-first businesses were created from scratch and talent was vastly more critical than location.
Should your startup start or go remote, keep the following in mind.
Remote workforces have tax implications for their companies. Specifically, there is a state payroll withholding tax. This is generally required for the state where an employee works or provides services, regardless of an employer’s location. This means your startup may need to register and withhold income taxes in several states.
These are complicated issues, and often, the best approach is to engage an expert early.
Here are the questions we ask clients:
- What are your sales and revenue by state?
- Where are your employees located?
- Where is your office located, as well as any other property?
Dollar amounts and property locations matter because each state has a different threshold when it comes to defining whether a nexus (more on that in a moment) has been established or not.
This isn’t something you can ignore. States do pay attention. When you register with a government agency, the state receives your tax ID number and other identifying information. This means you’ve got a presence in that state, and your business will be monitored and pursued for any resulting tax liabilities.
For example, one of our clients was stalled during an acquisition last year because they were discovered to be out of compliance with their remote workforce. So, it’s critical to register in each state where you have employees.