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Do You Owe Payroll Taxes for Out-of-State Remote Workers?

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Employers need to be aware of the potential tax ramifications of the recent shift toward work from home — especially when "home" is in another state.

Even as more employees return to work onsite, employers that had out-of-state remote workers for part of 2021 should check with their CPA about payroll tax withholding for remote out-of-state workers. The rules can be complex and vary by state, so it’s critical to get professional tax advice. Your bookkeeping and controller services provider can work with your CPA and payroll services company to help you stay compliant.

"Where do you work?" used to be a straightforward question. Most employees worked at their employer's physical location. But as the internet has enabled more people to work remotely — a trend rapidly accelerated by the COVID-19 pandemic — the answer has become more complicated. And for businesses that employ remote workers in different states, the tax implications can be significant.

Unfortunately, they're also very complicated.

So Simple in Theory ...
The tax withholding requirements for businesses were also much more straightforward in those "before" times. As the Tax Foundation's Jared Walczak put it, "typically [employers] withhold for the state in which the work is performed even if the employee lives in another state." So if your business was in, say, Philadelphia, you were obligated to withhold payroll taxes only for Pennsylvania, even with workers who lived in neighboring states like New York or New Jersey.

Since the widespread adoption of remote work, however, employers may be required to withhold for the states where the work is actually performed.

… So Complicated in Practice
Note that qualifier: may be. What further confuses the issue is that laws vary widely from one jurisdiction to the next. "Each state has its own rules," Eileen Sherr, Director of Tax Policy and Advocacy with the American Institute of Certified Public Accountants, told The New York Times.

Not only that, the Times article notes, but different states also interpret the same rules in different ways. In some states, withholding obligations kick in after as little as one day of remote work; in others it's up to 60 days. (A proposed federal law to set a nationwide standard of 30 days has so far failed to pass.)

Also, some states have exempted withholding for employees who were forced to work remotely due to the pandemic, while others have not. In a few cases, employers have found themselves caught in the legal crossfire between neighboring states battling over this issue.

What's a Law-Abiding Employer Supposed to Do?
The last thing any employer wants is a tax-related headache. But with so much ambiguity surrounding withholding requirements for remote work, what's the solution? "Tax preparation software may help you cut through the confusion by asking questions that will determine the steps you need to take," the Times article notes. "Or if the exercise makes your head explode, this may be a year to seek professional tax help."

Take the proactive step now to check in with your CPA if you have remote workers who live in a different state. Your bookkeeping services provider can work with your CPA and payroll provider to help you stay in compliance.

At Supporting Strategies, our experienced, U.S.-based professionals use secure, best-of-breed technology and a proven process to provide a full suite of bookkeeping and controller services. If you're ready to learn how you can move your business forward, contact Supporting Strategies today.

Andrea Sanders

Author:

Andrea Sanders

Andrea Sanders, Managing Director of Supporting Strategies | Philadelphia, provides outsourced bookkeeping and controller services to growing businesses.

Legal and Tax Disclaimer

This website is created by Supporting Strategies to provide general bookkeeping and accounting information only. Supporting Strategies does not provide tax, legal or accounting advice, and the information contained herein is not intended to do so. As such, the information provided should not be used as a substitute for consultation with professional tax, legal, and accounting advisors, and you should consult with a tax, legal and accounting professional before engaging in any transaction.