Since the start of Covid in 2020, businesses have seen a sharp increase in the number of “remote” or “telecommuting” employees working from home. This can have significant tax implications, both for the employer and the employee, if that employee resides in a different state.
It is commonly known that employees working from home in a different state than their employer are subject to the tax laws of their state of residence, not the state of their employer. However, many businesses are surprised to find themselves also subject to the tax laws of the resident states of their employees due to a concept called “nexus”. Nexus occurs when a taxpayer (individual or business) crosses a particular threshold of contact with a state jurisdiction such that the law subjects them to taxation, as they are considered to be “doing business” within that state. Having an employee who is performing work in another state is often enough to cross this threshold, however each state defines nexus differently and it is the responsibility of the employer to understand the nexus thresholds applicable to the state of each of their out-of-state remote employees, as well as the relevant tax reporting and compliance requirements should that threshold be crossed. Three main areas of potential impact:
- Employee payroll and withholding – discussed below
- Sales apportionment – some states and local tax authorities may require the company to apportion service revenue, subject to thresholds, based on where the income-producing is performed by the employees
- Sales tax – physical presence in a state can establish nexus, which could result in a sales tax liability
For the purpose of this newsletter, we will focus on employee payroll and withholding for situations with cross-border hiring between Oregon and Washington.
In the past, when an Oregon business hired a Washington remote employee, the employer paid Oregon payroll taxes other than state income tax withholding. Employees were able to avoid paying state income tax on their Oregon wages by working remotely from Washington, where there is no state income tax on wages. This was seen as a “win/win” by some employers who were effectively increasing their employees pay by around 9%, due to income tax savings, and the employer was only filing Oregon payroll forms and paying Oregon payroll taxes. However, since certain state mandated benefits are afforded based on state residency, such as unemployment (UI), Washington Cares (LTC), and paid family & medical leave (PFML), how are the programs funded if not from various payroll taxes paid by employers? The answer starts with the nexus threshold for the Business & Occupation (B&O) tax in Washington, which is crossed if either of the two circumstances below are met by the business. If this threshold is crossed, then the business will be required to “register” with the state of Washington, withhold from paychecks, and pay any related payroll tax liability.
- Had more than $100,000 of cumulative gross receipts due to business done in the state of Washington
- Had a physical presence in Washington – this means employees or property
Additionally, Washington State Department of Labor & Industries (L&I) defines its nexus threshold as being “principally localized” (meaning the service is performed) in Washington. Thus, the Oregon business with a remote employee in Washington must register for an L&I account to contribute to and secure Washington state workers’ compensation and unemployment coverage. The same is true for the Washington Employment Security Department (ESD), which receives contributions for the PFML and LTC programs.
Likewise, Oregon state law provides for certain benefits to its workers which are largely funded by Oregon payroll taxes, including employment taxes (SUTA) and workers comp (WBF), which must be paid into by employers who have employees working in Oregon, regardless of the state residence of the employer. Additionally, all employees will be subject to state and local income tax and withholding requirements. For the Portland metro area, this could also include Supportive Housing Services (SHS) or the Multnomah County Preschool For All (MCPFA) taxes. The first step in complying with these obligations is to obtain a Business Identification Number (BIN) by completing the “Combined Employer’s Registration”, which allows employers to report and pay all Oregon payroll taxes under one tax identification number and to file one report.
So, as Covid hopefully becomes a thing of the past, it is likely that some remote employment will continue indefinitely, and with this comes important tax compliance considerations where differing state residency applies. It is increasingly important to pay close attention to the state residence of your employees. If you have an out-of-state employee who is working remotely from home and you would like to discuss this further, we encourage you to contact our office.