Payroll Tax Considerations for Your Nonprofit’s Remote Workforce
(This blog was written by Joe Baumann, Employment Tax Director at CLA. You can contact Joe at Joe.Baumann@CLAConnect.com)
Has your nonprofit considered the payroll tax implications for your remote staff recently? Surprisingly, there is not a uniform procedure for withholdings or unemployment; instead, each state has their own regulations for residency, convenience rules, and reciprocity. All employers need to be aware of the state statutes and timelines for working in the specified state to assess liability and rely on their employee’s to accurately report their work address.
Employer Responsibilities:
Employers are responsible to track the states in which their employees work, live, and spend time remotely for taxation purposes. The onus of correct taxation will inevitably be on the employer. For example, there are states such as WA that may impose a penalty of 5% per month for not filing proper returns based upon their employee taxation.
To add to the complexity, regulations are ever changing, and it is important to review payroll taxation each cycle.
Employers are responsible for the following employment taxes for their employees:
- State Income Tax Withholding
- State Payroll Reciprocity Agreements
- State Unemployment Tax Withholding
- Additional State Deductions, such as Paid FML, Disability, Long Term Care
In most states, a nonresident employee’s income is sourced based on the employee’s physical residency or location. In multiple states, the withholding taxes are based upon the “Convenience Rule”. Normally, employees working for an employer located in another state would only be subject to income taxes where they live. However, under the convenience of the employer rule, employees residing in a state different from where the employer is located may have to pay taxes in both states.
Employers need to be mindful of physical locations, even within the same state, when it comes to local taxation. Some states have local taxes, such as IN, that are based upon where someone is located as of January 1. Other states, such as PA, may have the same city for local taxes, but different jurisdictions within the zip codes.
The most common reasons multistate payroll tax situations occur:
- Employers operate multiple business locations in different states.
- Businesses are located near the border between two or more states, so employees commute in from other states.
- Employees are working from home in other towns, counties, or states.
- Employees are traveling to nonresident states for temporary work assignments or working while on personal travel.
Employee Responsibility:
The employee does have a responsibility to provide the correct work address to their employer. There are implications to taxation of the state, local, and other tertiary taxes that can impact the employee taxation, and the employer can be held liable for not submitting the specified reports to the correct taxation authority. It is crucial for employees to inform their HR department of their living and remote work locations for taxation purposes.
Conclusion:
The remote workforce is an ever-changing landscape for employers, employees, and taxing authorities. Each state has defined their taxation based upon residency, work location, or time spent at a temporary assignment.
- Employers should be fully versed on the taxation for the states where they operate or have employees working remotely.
- Employees are required to fill out the appropriate forms for taxation for the states they are working or residing.
- Organizations should ask questions of an employment tax professional that can assist with defining the correct taxing authority based upon comprehensive knowledge of the employment tax rules in all 50 states.
CLA is here to assist you if you need help navigating the complexity of state regulations. Feel free to send us your questions!
Jeff loves helping nonprofits achieve financial excellence through improved monthly reporting, cashflow management, strategic planning, and systems design.
Comments are closed.