Some employers may be aware of payroll nexus requirements that apply to musicians and professional athletes who perform out of state and are subject to payroll, income, or sales taxes in one or more jurisdictions. However, with the rise of remote and hybrid work, businesses with employees that work in multiple states need to fully understand payroll nexus requirements that apply to each state or locality where their employees or business operate.
In this article, we’ll explore how payroll nexus requirements can impact your business’ tax and payroll accounting, and offer guidance on remaining compliant with state thresholds, reporting obligations, and more.
Payroll Nexus Standards and Accounting Obligations
When one of your employees works and/or lives in another state, your business may need to withhold income taxes in the state where they reside, even if they don’t complete work there. In other cases, if your employees work in multiple states, this can further complicate payroll accounting, requiring more nuanced calculations of time spent and taxes owed to each state where income-producing activity occurs, particularly if the states do not share reciprocity.
Although this payroll withholding can be challenging enough, some remote employees contribute significantly enough to business that a payroll nexus must be created to remain legally compliant. In fact, in many states, any W-2 employee who works remotely from the state where the business is headquartered creates a nexus, regardless of their weekly or monthly hours.
Additionally, the original standards for economic nexus based on physical presence/location have changed to account for the growing use of e-commerce. As a result, more states are using economic presence to tax out-of-state businesses conducting business in their state even if they lack a permanent physical presence there (an office or franchise, for instance). More states are using a numerical threshold that applies to sales, property, or payroll/compensation paid during a tax period to determine whether an out-of-state business is subject to state and/or local income tax. This standard, known as factor presence nexus standard, provides parameters for nexus designation in some jurisdictions, but many states are still entitled to establish nexus regardless of these numerical thresholds.
Currently, fifteen states use a sales amount threshold as the standard for economic nexus, while another twenty-eight states base business nexus on the number of transactions and sales, property, or payroll thresholds. As just one example, in Ohio, nexus thresholds are $50,000 or more in payroll or property; $500,000 or more in gross receipts, or 25% of a business’ gross receipts, total payroll, or total property. Of course, these values vary state to state and many states adjust the thresholds annually to account for inflation or other factors.
Considerations for Remote Employees, Contractors and More
Managing payroll nexus requirements for remote, hybrid, or part-time employees (and contractors) can be a challenge for businesses committed to ensuring tax compliance.
Regulations vary, but as a general rule, a remote employee’s work hours (part-time vs. full-time) do not impact nexus requirements. A nexus is more or less automatically created if they are a W-2 employee telecommuting for out-of-state business.
Similarly, if a hybrid or hybrid-at-will employee works for even one week a month in an out-of-state home office, this work configuration will create a nexus based on the regulations in many jurisdictions.
As for independent contractors who work remotely (out of state), the contractor’s work in another state could create a nexus if they represent the business as a consultant, complete training, or complete installations. This is also true in many jurisdictions if they sell products or services for the out-of-state business.
Evolving State Policies and Compliance Considerations
Since nexus requirements vary by jurisdiction and can create major payroll and tax accounting challenges for businesses, more states are developing websites and apps to assist retailers with real-time calculations, as well as descriptions of tax rate components that apply based on geographical coordinates or zip code. Even with these early measures in place, it’s essential to seek expert support and guidance on nexus requirements based on your current workforce, revenue-producing activities, and the local or state regulations that apply to your business. This is especially true for businesses with remote/hybrid employees, contractors, or high-volume e-commerce. Properly managing these changing tax regulations can help your business avoid local, state, and IRS penalties for inaccurate withholdings or other violations.
Although states are taking some steps to simplify the process for employers, many are also using state auditors to collect information about business practices: whether businesses using e-commerce are collecting sales tax, as just one example. More obvious “red flags” like inaccurately documented property tax records or sizable purchase records from in-state consumers can also trigger an audit or investigation into other possible violations.
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Whether your business employs out-of-state remote workers or conducts business out of state (physically or through e-commerce), our payroll solution can help you manage your payroll needs quickly and easily. Get started today and see how Workforce PayHub’s intuitive payroll platform can help you streamline all your payroll processes and ensure long-term legal compliance.
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