Multistate Payroll Taxes: The Advantages, Pitfalls and Remote Work
Monday, August 17, 2020
It may sound surprising, but the COVID-19 outbreak has created (and accelerated) several trends – and we don’t mean bedazzled face masks, either. Take remote work, for example: At the start of 2020, a poll conducted by Gallup found 54 percent of office workers would quit their current job for a job that let them work remotely.
Needless to say, a lot of those workers got their chance mere weeks after Gallup released their findings.
Remote working has taken off like a Falcon 9 in the wake of the COVID-19 pandemic. The Society for Human Resources Management (SHRM), a professional human resources association, found 64 percent of US employees are now working from home. And according to Gallup, it’s a trend that looks to stick around for a while: Nearly 60 percent of US employees want to continue to work from home even after restrictions are lifted.
“64 percent of US employees are now working from home.”
– The Society for Human Resources Management (SHRM)
Payroll Tax Management Blog
Multistate Payroll Taxes: The Advantages, Pitfalls and Remote Work
Monday, August 17, 2020
It may sound surprising, but the COVID-19 outbreak has created (and accelerated) several trends – and we don’t mean bedazzled face masks, either. Take remote work, for example: At the start of 2020, a poll conducted by Gallup found 54 percent of office workers would quit their current job for a job that let them work remotely.
Needless to say, a lot of those workers got their chance mere weeks after Gallup released their findings.
Remote working has taken off like a Falcon 9 in the wake of the COVID-19 pandemic. The Society for Human Resources Management (SHRM), a professional human resources association, found 64 percent of US employees are now working from home. And according to Gallup, it’s a trend that looks to stick around for a while: Nearly 60 percent of US employees want to continue to work from home even after restrictions are lifted.
“64 percent of US employees are now working from home.”
– The Society for Human Resources Management (SHRM)
It’s an option that employers like, too! Gallup also found working remotely is effective, with almost 80 percent of employees reporting greater efficiency. Plus, business owners in a hiring mood can take advantage of a much wider talent pool to draw from.
However, employers should take note that remote work brings with it a set of tax compliance complications. If they’re not aware of them, some businesses may not even realize certain hiring decisions can add serious tax challenges. This is especially common in industries such as higher education, transportation, and healthcare.
Payroll Tax Nexus: A Complex Connection
Let’s say you just made the perfect hire for your organization. Your new employee is sharp, has a great skill set, and is easy to work with. However, they live in a different state from the one your business is located in. No problem; they prefer working remotely and thanks to video chats, SaaS, and other technology, it’s pretty much like they’re in the office anyway.
A payroll tax nexus with another state, a connection between your business and the taxing authority (or authorities), can be triggered when your remote employee is based in a different state from the state your office is located in. See, having just one employee based in a state is often enough to count as your company having a physical presence in that state. Needless to say, a connection between you and a tax agency is more than a handshake over a cup of Joe. A payroll tax nexus opens you up to tax obligations, filing requirements, and other compliance issues you may not be aware of, especially if you don’t realize your new hire means your business is now operating across state lines.
“A payroll tax nexus opens you up to tax obligations, filing requirements, and other compliance issues you may not be aware of, especially if you don’t realize your new hire means your business is now operating across state lines.”
States of Confusion with Multistate Taxes
Things begin to get very complex once your organization is operating in more than one state. Why? Tax policies are an area where states vary wildly. For instance, some states require employees to meet certain thresholds before employers have to withhold state taxes. Other states require employers to start withholding employee wages from day one of the employee’s terms with you. There’s also a complicated tangle of reciprocal agreements, different rules and other challenges employers have to deal with once their businesses move across state lines.
PTM Tax & Compliance Manager, Kelly Gonzalez, is well aware of these complications and challenges. “When it comes to the states, there are variables that must be discovered, such as whether a state even carries a threshold, or if there are multiple thresholds, like having one for days worked and the second for the amount of dollars earned before an employer has to start reporting the payroll taxes,” says Gonzalez.
According to Gonzalez, the tax rules for multistate payroll tax management are about the timing – it’s very important to determine when you’re going to start taxing employees. “Timing to do this is when you are set-up for that state,” Gonzalez advises. “By quarter-end, you need to have the state identification set-up, so you can move your wages and income tax.”
Gonzalez says that the litany of questions surrounding multistate payroll tax has been a frequent topic in the American Payroll Association’s (APA) digital community. “Every day in the APA listserv, bureaus have been asking these questions since March. Now that we’re past COVID’s first round of tax credit and law changes for the 2nd QE filing and 941 are complete, everyone is looking at the taxation of their employees who are working remote,” states Gonzalez.
It’s a situation that can test even seasoned tax pros. For a business owner trying to wrangle the ins and outs of multistate taxes on their own, it’s a tangled mess that can often result in fines, damaged credit, and bankruptcy if it’s not watched carefully. For payroll providers, it’s a earful of familiar questions like, “Do I tax this person here? Or, How long do I have before I start taxing?”
Advance Knowledge is Key for Payroll Taxes
Fortunately, there are a few things you can do to ensure you’re staying compliant when it comes to payroll taxes. What is a good first step? Find out what the relevant tax agencies are in the states your employees live in. Then, review their websites and see where they post their updates and alerts, so you’re not caught flat-footed at quarter- and year-end. Secondly, it might be worth restricting your hiring of those workers in your state, although this can limit one’s vision for their company. Finally, if you’re in a growth mode, remember to grow your tax and/or payroll department along with your business.
These suggestions work, but they’re also time-consuming, somewhat limiting and expensive – especially for small to medium businesses just trying to stay afloat. Fortunately, there’s an even better strategy: finding outside expertise.
The Benefits of a Payroll Tax Specialist
There’s a lot of payroll tax pros out there, so it’s important to shop around. Look for a tax partner that respects your vision, offers a variety of solutions tailorable to your needs and a software platform that stays out of your way. The best third-party payroll help takes time-consuming tasks (and their associated risks) off your hands, leaving you to handle your company’s growth model – and success.
There are over 11,000 tax agencies in the United States, and Payroll Tax Management helps you stay compliant with all of them. Our combination of software solutions tailored to your needs and services allow us to fill a critical gap in the marketplace. Including assistance with setting up state identification. PTM handles state registration services for a fee with our PayTax or FlexTax services. Simply put, if you do not want to do the registration for multiple states yourself, we’ll do the applications for you.
Download our whitepaper for more information on the multistate payroll tax compliance challenge and some best practices for staying out of trouble. For legal questions regarding state income tax liability, contact a lawyer who specializes in tax law.