Running a successful small business is all about making sure you have the right person in every position. Sometimes, the right person lives 2,000 miles away from the office. Oh—and keeping them on the payroll gives that business nexus in a new state, creating new payroll and sales tax obligations.
The rise in remote work has made payroll accounting and nexus issues more complicated for businesses whose workers are now spread out across different states. Those businesses are now looking to their CPAs for help. While CPAs may have a lot of experience answering clients’ nexus questions related to sales taxes, income tax nexus issues may be less familiar. Some of the questions a client might bring to their accountant is, does our remote employee create nexus for us? If so, how does that affect our tax and payroll accounting obligations?
Nexus and Payroll Accounting
Generally, a business is expected to withhold an employee’s income and payroll taxes and remit them to the state in which the employee works. When the business has nexus in multiple states, and an employee works in one and lives in another, payroll accounting gets slightly more complicated. A business may be required to withhold income taxes for an employee in their state of residence even if they never work there.
This requirement makes payroll accounting more time-consuming for businesses, which have to withhold and report income taxes to two (or more) states. If an employee works in multiple states, payroll accounting gets even harder because the business needs to break down how much time the employee spent working in each state to figure out its tax withholding obligation to each of them. (Payroll is simpler if a client and their out-of-state employee/s are both in states that share reciprocity, agreeing that taxes will only be withheld for the employee’s state of residence.)
Payroll withholding is one thing. But for clients with remote employees, the big nexus issue is whether an employee working remotely in another state has enough of a presence there to create nexus for the business. In most states, the answer is yes.
Creating Nexus: Home Offices and “What If” Questions
As CPAs know, every taxing jurisdiction has its own standard for determining whether a business has nexus. In most places, having an employee teleworking from the state does create nexus. It doesn’t matter whether they work from a home office, co-working space or coffee shop; just the fact that they perform work for an out-of-state business is enough to trigger nexus.
That’s most places. But some states say that an in-state employee creates nexus for an out-of-state employer only under certain conditions. Then COVID started and many states (but not all) introduced nexus “safe harbors” that temporarily allowed people to telecommute without creating nexus. Many of those provisions expired in 2021, but not all. Minnesota’s safe harbor is the most recent one to expire, terminating at the end of June 2022.
All of which is to say, it’s no wonder that clients might be confused about where things stand these days. Nexus rules have been shifting quickly over the last few years and there’s a lot to unpack. These are just a few of the questions CPAs might hear from clients with employees working in other states.
What if a remote worker is an independent contractor?
While a business doesn’t have to withhold income taxes on behalf of an independent contractor, the contractor’s presence in another state could create nexus for the business—depending on their duties. If they sell goods or services on the business’s behalf, their presence will trigger nexus in most states. An independent contractor who represents a business (like by doing training, installation or consulting work on the business’s behalf) could also create nexus in many states.
What if a remote employee in another state works part-time?
In states where a W2 employee telecommutes for an out-of-state business, the number of hours they work isn’t relevant for nexus. Their presence creates nexus even if they only work part-time.
What if an employee only works out of the state occasionally or temporarily?
Employees love flexible work schedules but they can create nexus problems. Say an employee commutes to their employer’s office three weeks each month and works the other week from their home office in another state. Or, an employee negotiates an arrangement that allows them to work for two months out of the year from a vacation house in another state. Both these scenarios would trigger nexus in many places.
Managing Nexus for Your Clients
Specific guidance depends on nexus definitions of the states involved. That’s why businesses have to turn to their tax advisors for help to decipher the complex web of income tax nexus laws. Misunderstanding nexus could expose your clients to IRS and state penalties for failing to withhold taxes. Urge them not to navigate complex and evolving tax rules on their own and to call you about any out-of-state employees to assure they’re in compliance with current laws.
And when you need help answering a client’s question about nexus, payroll taxes, or any element of payroll accounting, getting fast and accurate answers is as easy as picking up the phone and calling ConnectPay to speak with your Client Success Manager. They’re the same person who helps your clients, so they’ll be ready to jump right into your question without a lot of back-and-forths. If necessary, they’ll loop in our dedicated tax team to make sure you get the answers you need.
We know CPAs are busy. ConnectPay is here to make payroll easier for both you and your clients, in whatever way we can. Let’s connect to talk options.