Attention nonprofit organizations, if you have employees working remotely from a different state, there are some tax considerations you need to take into account. There can be tax withholding and reporting obligations for employees working remotely and each state has their own requirements as to what creates a presence, requiring you to register to do business in that State.

Remote work…growing trend

The COVID-19 pandemic accelerated the growing trend of employees working remotely and the ability to hire talent from outside of your geographic area. Consequently, employers are having to adapt to manage the new employer tax obligations, as failure to meet them can result in significant additional costs through penalties and interest.

Do Remote Employees Create Nexus?

A remote workforce can dramatically affect an organization’s state tax nexus footprint. An organization is generally considered to be doing business and subject to a state’s tax laws if the organization has employees working in the state. Organizations with employees working remotely could find they are subject to a state’s tax laws based merely on the presence of the employee. An employee living in a different state would normally not create nexus for the employer, but as a remote worker, that employee attributes presence to the employer through their performance of their employment duties at home.

Establishing new nexus for any state tax due to a remote workforce could create and complicate registration and compliance obligations.

Withholding individual income taxes

With new remote employee scenarios, organizations must determine where, and in some cases if, they must withhold state and local income taxes.

Generally, individual income tax jurisdiction is governed by an employee’s state of residence or state of employment.

However, there are exceptions to this rule.

Some states will subject a nonresident employee of an in-state employer to tax on 100% of their wages if certain requirements are met. Other states and certain localities will subject any employee activity occurring in their jurisdiction to tax. While some states provide for reciprocal individual income tax agreements, most states do not.

Navigating the application of nonresident individual income tax rules can be exceedingly complex…but we’re here to help!

For most organizations, the unexpected experiment in mass remote working has been surprisingly successful. It is not without its challenges and one of them is managing the employer tax compliance requirements. KLR’s Nonprofit Tax Services Group in conjunction with our Corporate Tax Services Group is designed to help you assess your employer obligations in an effective and efficient manner. We can guide you through this process to provide you with the peace of mind and confidence that comes from knowing that your employer obligations are being appropriately managed.