Hidden Traps of Using Remote Workers

Remote work arrangements, which began as temporary solutions during the pandemic, are permanent for many companies. There are now three times more remote jobs than in 2020. These arrangements can be a win-win for companies, employees, and communities.

• Companies save on needed space and employees take fewer sick days. There are also reports that employees are more efficient.
• Employees are happier because they have more time for family and personal endeavors. They save on commuting time and costs.
• Communities have a better environment. There’s reduced traffic and fewer carbon emissions.

But there are some cautions for employers. Don’t overlook any of the following:

Take the correct payroll withholding

It doesn’t matter for federal income tax withholding where employees are located, but it does for state income tax purposes. Each state with an income tax has its own rules, and problems can arise when the company is in one state but workers are living and working in another. Usually, income tax is withheld in the state where workers perform their jobs. But there are exceptions that may require withholding in the state where the employer is located.

And things become even more complicated when a worker lives in the same state as the employer but works in another state. Generally, withholding is in the employer’s state unless a “convenience of the employer rule” applies. This says that the worker must work in another state at the demand of the employer, so withholding is done in the state where the work is performed. Not all states have this rule.

There have been proposals at the federal level to restrict states from imposing income taxes on employees who are in a state for only a limited period (e.g., a few days a month). For example, an employee works remotely in State A but is required to attend company meetings held twice a month in State B. Can State B require withholding for those two days a month? One bill proposed last year would have barred income tax on and withholding for a remote worker unless that worker earned remuneration for employment duties for more than 30 days within the year.

What to do: Check with your CPA or other tax advisers, or work with an outside payroll company. And monitor federal legislation that may impact withholding on remote workers.

Watch for potential income tax consequences

Having remote workers creates a “nexus” to another state, which means an employer likely is obligated to pay some income taxes in that state. The amount of tax depends on how the company’s overall income is apportioned to that state. Each state has its own rules about apportioning income for tax purposes.

What to do: Discuss this matter with your CPA or tax adviser and, where necessary, work to minimize apportionment to higher tax states.

Continue workers compensation

You must cover workers even though they work remotely and even if they work from their own homes. OSHA won’t inspect their homes for safety and doesn’t expect employers to do so, but you must have insurance protection and remote workers can submit claims for on-the-job injuries or illnesses.

What to do: Discuss safety issues with remote workers. Also, discuss workers’ compensation matters with your workers’ compensation agent if you have one or an employment law attorney.

Follow state employment tax for remote workers

State laws apply to workers within their boundaries, even if they’re on the payroll for a company out-of-state. This means the following:

• State minimum wage and overtime rules
• State benefit rules (e.g., family and medical leave; time off for voting, school activities, etc.)
• Paying state unemployment tax

What to do: Review state laws for all locations in which you have remote workers.

Conclusion

Having a remote workforce may be a reality today. Employer responsibilities are amplified by the number of locations employees work in. Get good advice on what to do.

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