In the months since COVID-19 has taken our country by storm, thousands of Americans have transitioned to working at home. It has caused many companies to introduce or expand a remote work policy for their employees.
“Nexus” is a term used to describe a situation in which a business has a tax presence in a particular state. A “nexus” is essentially a connection between the taxing authority and an entity that must collect or pay tax.
State nexus has become a larger and more complicated issue over the last several years, due to the expansion of online retailers and the migration of how individuals and businesses operate. And that was before a pandemic arose! Now, there’s as much confusion and complication surrounding state nexus issues as there has ever been.
One of the primary factors states commonly use to determine whether a business has created nexus (or a filing requirement) in their state is payroll. Employee wages that are allocated to a particular state can be essential to the determination of whether a business must file in that state and, if so, how much of their income is allocable to that state.
That’s where the recently introduced or expanded remote work policies come into play. It’s not always so simple to determine which state your payroll is allocated to.
Here are a couple of examples of how both businesses and individuals can be impacted by these changes…
Nexus for Businesses
Say an employee lives in one state (State A), but works in another state (State B) where a business has its office. Traditionally, that payroll would obviously be sourced to State B – where the office is and where the work is performed. If that employee now works remotely from home in State A – does the company now have an “office” in or allocable wages to State A?
The answer to that question is more complicated than we might hope – and it likely would directly impact the determination of whether State A’s taxing agency will assert nexus over that company, potentially creating a filing requirement that didn’t previously exist.Some states have issued guidance on employees who telecommute that indicates temporary remote work situations will not be considered for nexus – however, because this has not been defined for every state across the U.S., and because many temporary remote work situations are most certainly going to become more permanent even after the pandemic, you should consult with a tax professional to analyze your unique situation.
What About Individuals?
Nexus issues are commonly considered by businesses that have interstate commerce, a remote workforce, or that are located near a state border. But it’s worth noting the impact a transition to remote working could have on individuals as well.
An employee who resides in State A but works in State B may be liable for income taxes in State A and/or State B. In most states, the rule is that the employee’s physical presence dictates where the tax is due. However, each state has its own tax statutes and regulations, so each employee and company must be individually analyzed, particularly if the environment has now changed regarding what might constitute physical presence.
So, how should you proceed?
The truth is, nexus laws are often changing, especially amidst the current climate – but it’s still important to stay on top of them. They even vary by tax type, so it’s possible to have nexus for one tax and not for another. Professional guidance is required to be sure that you’re meeting all of the requirements for your business – while also not wasting money on paying any unnecessary taxes.
Every employee and company’s situations are unique. Contact the experts at Culpepper CPA today to see how your tax situation may be impacted by changes in your remote work policy. We can help you stay on top of the complicated nexus issues surrounding filing requirements for various types of taxes and can even help you structure your policy in a way that mitigates the impact on your organization. We’re here to help make this confusing road much easier to navigate.