Using a remote workforce became vastly more common during the pandemic, and that’s not about to change. Even as offices reopen, many employees are requesting the flexibility to continue working from home.
For employers, this shift to remote work also requires a shift in accounting practices.
Be aware of state and local taxes
Employers may be surprised to learn that although there are benefits to having a remote workforce, there are also costs. In many cases, businesses will need to pay additional state and local taxes, in addition to incurring expenses to comply with a variety of regulations.
State tax authorities are certainly aware of the remote work phenomenon, and they’re eager to enforce legacy laws to capture additional revenue for the residents of their state. To stay on top of the latest requirements, employers need to become familiar with state taxation terms such as apportionment, sales-sourcing, and the telecommuter rule.
It’s also important to be mindful of employment laws, business registration requirements, and other non-tax regulations that may apply in the state or country in which you have virtual employees.
What is a virtual office?
A further complication for employers is that there is no strict definition of what constitutes a “virtual office.” A company employing a multi state or multinational virtual workforce will want to know whether it needs to pay income and other taxes to the local revenue authorities where the virtual employees work.
But here’s the rub: Each tax jurisdiction applies a different standard when determining what constitutes a “taxable presence.” For example, many U.S. states apply an economic nexus standard that relies on a certain number of transactions with customers in a given state. That’s different from what countries that have a treaty with the United States typically do, which is to apply a permanent establishment standard, which is akin to a fixed place of business or physical presence test.
Navigating the new remote workforce world
The reality is that many employers will need help navigating the complexities presented by virtual office and remote workforce arrangements. Especially during this rapid transition period, you may need expert support to understand federal, state, local, and foreign country tax implications and to develop a sound strategy for achieving tax efficiency while supporting your remote employees.
Get expert support
Insero & Co. is a public accounting firm with decades of experience working with both nonprofits and businesses of all sizes. From audit assistance to business consulting, our experts can help you find smart ways to modernize your accounting processes to be more efficient and productive and account for your remote workforce effectively.