By Andy Nguyen, CPA
It’s an understatement to say that the job market has changed because of the ongoing COVID-19 pandemic. While some industries have seen their demand plummet and customer base shrink compared to pre-pandemic times, others have had the exact opposite issue.
The adoption of remote work across the country was previously something that perhaps had been anticipated, but many had considered to be years away.
With the number of vaccinations increasing and the pandemic showing signs of somewhat receding, employers and employees have begun to adapt to this new work environment. Many across the country have witnessed both the benefits and pitfalls of remote work. Additionally, many employees and employers have seen benefits of such an arrangement, most notably with the expansion of the labor pool. Rather than getting caught up in or continuing the endless cycle of self-cannibalization from their direct competitors in the local area, firms have begun to look nationwide and abroad as a means of expanding their talent base.
With the new opportunities, however, come some potential pitfalls.
Here are a few things to keep in mind before you decide to hire remote workers.
As the result of the passage of AB 5, there have been clear rules and regulations dictating who can or cannot be classified as an independent contractor within the state of California. Other states may not have any clear-cut rules, or may even have rules that conflict with your company’s home state regarding the classification of workers as an employee versus an independent contractor. It’s highly advisable to check the laws of the state of the worker’s residence, as well as engage local labor counsel for confirmation before making an offer to a prospective candidate.
With a remote worker outside of your state, you may have created nexus between your business and the state of their residence. This is highly dependent on their employment status (see above) as well as the role that worker plays in the company. If the person is an employee for the company and either solicits sales or takes part in administration, there is a higher likelihood of creating nexus as opposed to if the worker was an independent contractor working on a support role.
Although the Multistate Tax Commission has created rules to add consistency to state definitions regarding which activities create nexus, not all states are in conformity and some states only partially conform.
Furthermore, the payroll factor may not be the only apportionment factor affected. Depending on the worker’s status and role in the company, the revenues earned in that state may now be apportioned to that state.
The hiring of a remote worker may trigger increased compliance obligations for the company. An out of state independent contractor may only cause a company to issue a 1099 to the contractor, with the payment sourced to the contractor’s state of residence.
On the other hand, if the worker is an employee, the company will be responsible for withholding federal and state payroll taxes for the employee and file quarterly payroll tax forms as well as an IRS Form W2 at year end.
Depending on the worker’s role and the resulting impact on creating nexus where the work is performed, the company may also be obligated to file an income tax return with that state. In addition to income tax considerations for sales, companies also need to consider sales tax nexus. Depending on the good or service provided, sales may be subject to sales tax and require the company to both collect and remit sales tax and file a sales tax return. Depending on the jurisdiction and level of activity, this may be filed on either a monthly, quarterly or annual basis. Although sales tax has been a secondary concern in years past, the ruling on the Wayfair case by the Supreme Court has resulted in sales tax becoming a more significant issue.
The remote boom resulting from the pandemic has opened new and unique opportunities to expand one’s labor pool. However, while there are benefits to doing so, one must be aware of any possible pitfalls and to plan accordingly to avoid unforeseen issues.
Originally published by CalCPA in the August issue of California CPA