State Policy Update: the tax implications of remote work

Engine
4 min readOct 20, 2022

By Jennifer Weinhart, Senior Policy Advisor, Engine Advocacy & Foundation

In a series of State Policy Updates, we are exploring how state initiatives are impacting the innovation happening in startup ecosystems across the country. While much of Engine’s work centers on policy advocacy and education in the federal landscape, state-based policymakers impact startup formation and growth through their own work. We’re tracking what’s working for startups, what’s falling short, and what federal policymakers can learn from their state-level counterparts.

As much of the country continues to emerge from pandemic-imposed restrictions, remote work is a shift that remains for many workplaces and employees. But the policy landscape dictating tax obligations for companies employing remote workers, and the workers themselves, has evolved. According to one poll, 39 percent of “remote-capable employees” were working remotely full-time, with another 42 percent working a hybrid schedule. Many of these employees may have lived in the same state as their parent company initially, but have relocated — either temporarily or permanently — as a benefit of working from home, providing employees with more flexible work and companies saving on overhead costs. But state-issued waivers that facilitated remote work during the height of the pandemic have long since expired. And remote work can give rise to unique complications, particularly in the tax space, that are difficult for small businesses, including startups, to navigate.

During the initial wave of the virtual workspace shift amidst the height of the pandemic, many states were forced to issue guidance to address potential tax and labor issues as a result of work from home orders. In addition to addressing payroll withholding taxes — taxes withheld by employers, including income tax and social security — employers had to identify under which state or states they were liable for business income tax if the presence of remote workers created a taxable nexus for their company.

Generally speaking, a company has a taxable nexus to a state if they have employees working in a state, though other factors, like economic presence. Establishing a nexus in a state can open a company up to income and franchise taxes and sales and use taxes of that jurisdiction and could create registration and compliance burdens. A number of states indicated that the presence of remote work employees did not satisfy the nexus requirement but only so long as the employees work location resulted from the effects of the COVID-19 pandemic. This guidance, however, was largely issued temporarily, with many provisions sunsetting it in 2021. Now that the waivers in many states have expired, unless an employee’s work is covered by an exception for sales solicitation of tangible personal property, employing remote workers can very likely create a nexus between an employer and potentially multiple states. In that instance, businesses could be subject to additional taxes and compliance burdens from states where they have only a single remote employee but no economic presence beyond that.

Remote work also brings implications with respect to state payroll withholding taxes for employees, possibly requiring an employer to withhold income tax across several states depending on the locations of their staff, and could require business registration in multiple states. Absent a reciprocal agreement, for example, as is seen with Washington, D.C., Maryland, and Virginia, or a “convenience of the employer” rule — the physical presence of the employee determines the withholding tax. But amidst the pandemic, many companies saw employees work remotely from different states. While some states have at least temporarily adopted a convenience of the employer rule, where tax will still be remitted to the employer’s state, others have decided to impose tax based on employee location. This could result in double taxation if employees and employers exist in states with opposing rules, each claiming the tax. While policymakers have attempted to address this issue legislatively, including through the introduction of the Remote and Mobile Workforce Relief Act, which would permit employers to continue to temporarily assign income for remote workers to their pre-pandemic location versus their remote work location, Congress has yet to pass the bill.

And state and local labor laws could similarly impact startup employers. States have differing rules outlining requirements and benefits for employees. From wage and hours rules to workers’ compensation to noncompete agreements and unemployment insurance, employers may need to plan for differing treatment amongst their staff.

While many aspects of life are starting to return to normal, many workers still wish to remain working remotely, and many employers are continuing to allow the benefit. Startup employers must pay close attention to the tax implications of having remote work employees and the rules across jurisdictions, remaining mindful that the presence of remote workers could result in additional tax obligations. For startups with limited resources, the need to hire additional tax consulting services may be a burdensome, but necessary expense to navigate the varying and sometimes conflicting laws across the U.S.

Engine is a non-profit technology policy, research, and advocacy organization that bridges the gap between policymakers and startups. Engine works with government and a community of thousands of high-technology, growth-oriented startups across the nation to support the development of technology entrepreneurship through economic research, policy analysis, and advocacy on local and national issues.

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Engine

Engine is the voice of startups in government. We are a nonprofit that supports entrepreneurship through economic research, policy analysis, and advocacy.