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Working from home has become the new norm for many American workers. In 2016, a Gallup survey found that 43% of those employed in the U.S. spent at least some time working remotely. It’s a practice that has many benefits for companies, including access to a wider pool of employee talent (regardless of location), reduced employee turnover, and cost savings.
But working from home, as innocuous as it may seem, brings with it a hefty dose of compliance requirements. These can impact everything from business taxes to workers’ compensation. Unfortunately, such considerations are sometimes a surprise to employers who don’t have an HR department or lack an understanding of the implications of having remote employees.
If you already have, or intend to roll-out telework practices, here are some of the things you need to know about maintaining compliance with the laws and regulations that govern remote employees.
If your employees work remotely, out-of-state, where do you withhold taxes?
As a rule, employees pay taxes to the state in which the work is performed (known as the “physical presence” rule). For example, if your head office is in state A but your remote employee works at home in state B, under the physical presence rule you are required to withhold unemployment and state taxes in state B, even if you don’t have a physical office there.
But in certain states the law is different. This may mean, for example, that remote employees are subject to income tax in both the state they reside and the state in which their employer operates. And what if an employee only works a few days at home (out-of-state) and the remainder at the office? Now, things get more complex. You (and your employees) will probably want to get the advice of a tax expert due to the complexity of this issue.
If you have formed a corporation or limited liability company, and you have employees working in a state other than the state in which your corporation or limited liability company was formed (which is referred to as a “foreign” state), then, depending on your type of business, what your remote employee is doing, and how many remote workers are in a state, you may need to “qualify” your corporation or limited liability company in that state.
Foreign qualification is the process of applying for authority to do business in a state other than the one in which the corporation or limited liability company was formed. You may need to qualify if, for example, you have a physical presence in the foreign state, or if you routinely accept orders or execute contracts there. In addition, once qualified, the corporation or limited liability company will have other compliance obligations such as having to designate and maintain a registered agent and file an annual report. A registered agent is a person (which can be a corporation as well as an individual) with a physical address in the state who can receive legal documents on behalf of your business.
Many municipalities require that home-based workers obtain a home occupation permit. Even though they are not technically operating a business out of the home, as more work is done off-site and the more independence remote employees gain, the lines become blurred. Check with your employee’s local city or county zoning laws to see if a permit is required.
The term “tax nexus” is used to describe a situation when a business has a tax presence or is “doing business” in a state other than its primary physical location. Depending on what your remote out-of-state employees are doing, your business may become subject to that state’s sales and use, income, or other tax laws. It is best to talk to your tax adviser to find out for sure.
As you add remote employees to your workforce, your network endpoints and potential avenues for cyber-attack increases. Mobile devices, wireless networks, and even inadvertent disclosure of data in public spaces all expose your business to unwanted vulnerabilities. Ensure that you have security policies and guidelines in place to prevent data loss. Educate yourself on cross-border data transfer laws and the implications of sharing information about global customers with home office workers.
Most states require that businesses provide worker’s compensation coverage for employees. But what if a remote worker is injured on-the-job? In most instances, they can claim benefits, but state laws differ on what constitutes a work-related injury. To avoid any confusion, set clear guidelines around the job duties and work hours of your remote employees so that you can more easily separate truly work-related claims.
Maintaining good standing requires constant attention, especially when you do business in multiple states. If you want to learn more about how to maintain your good standing, contact a CT representative at 844-682-1582 (toll-free U.S.)
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