The pandemic accelerated a massive shift to remote work, revolutionizing the way we do business. Fast-forward five years, and approximately 22 million U.S. employees continue to log in from home. It’s also not uncommon for employees to work in different states than their employer.
This new reality of distributed teams has transformed the traditional understanding of state tax nexus — the connection between a business and a state that triggers tax obligations. Understanding these evolving tax implications isn’t just about compliance; it’s about making strategic decisions that could significantly impact a company’s bottom line and operational flexibility.
For employers, understanding the state tax nexus has never been more critical.
Decoding state tax nexus: Beyond the office walls
Traditionally, physical presence determined nexus — offices, warehouses or retail spaces — but remote work has expanded its definition.
These new nexus triggers may require employers to implement employee tracking systems and regularly review their multi-state tax obligations to ensure they’re in good standing:
- Employee location. Having even one employee working remotely in a state can establish nexus, potentially creating tax responsibilities in that jurisdiction.
- Revenue thresholds. Many states have economic nexus laws that require tax registration based on total revenue generated within the state, regardless of physical presence.
- Temporary work arrangements. Short-term remote work and even employee travel can unexpectedly create tax obligations, even if an employee is only working temporarily from another state.
Unlike traditional nexus rules, there’s also an economic nexus that focuses on revenue thresholds, transaction volumes and digital interactions, rather than physical presence. Employee locations, digital service delivery and distributed workforce models can all simultaneously trigger multiple state tax obligations, creating a complex compliance landscape.
To avoid noncompliance, businesses may need to develop and implement sophisticated strategies to address a range of intricate tax implications:
- Tracking employee locations and work patterns
- Understanding varying state tax regulations
- Maintaining accurate records of remote work arrangements
- Calculating potential tax liabilities across multiple jurisdictions
Building a tax-compliant remote work infrastructure
The key to managing tax nexus obligations is to transform obstacles into manageable processes.
- Develop clear policies. Create comprehensive remote work guidelines that address pre-approval requirements for out-of-state work, duration limits for temporary relocations, tax implications notification procedures and more.
- Invest in employee training. Implement regular training programs focusing on location reporting requirements, tax compliance procedures, documentation protocols and state-specific regulations.
- Create compliance checkpoints. Establish periodic review processes, including regular economic threshold monitoring, annual compliance audits and state registration reviews.
- Leverage technology solutions. Utilize advanced tools for real-time location tracking, automated tax calculations, multi-state compliance reporting and economic nexus monitoring.
- Partner with the experts. By working with a trusted tax professional, businesses can have peace of mind they’re getting the proper guidance and expertise to address the tax nexus challenges of remote workers.
The CPAs at Magone & Company can help your remote operations remain compliant and minimize your tax liability. Reach out to learn more.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance that is specific to your unique circumstances