Work in the future will look significantly different from what it does now. The epidemic tested the world’s workplaces and cultures for adaptability and reaction. Faster than anybody anticipated before the epidemic, hybrid and remote working methods have taken hold since the interruption.
Employees working remotely perform their tasks outside the company’s main office. For instance, locations other than the typical corporate office building or campus, an employee’s home, a co-working or additional shared space, a private office, or any other place may be considered.
During the coronavirus pandemic, more workers worked from home than usual. This shift presents some unique tax implications for both employees and employers.
It could also impact how companies sell products and services to people in different states. What you should know about taxes for remote employment is as follows:
Creating a nexus
The word nexus is used in multiple ways and has many meanings, but its core meaning is the bond or link between two elements. For example, regarding sales and use taxes, nexus is the connection between a business and state-level taxation. Several factors, including physical presence, sales activities, and affiliates, can create this connection. To determine if your company has nexus with a particular state, consult a qualified tax professional.
In the past, nexus was simple to determine. For example, a business’s physical presence in a state would dictate where it was required to collect and remit sales taxes.
These standards depend from state to state, with some using different measurements and criteria. In addition, some states will exclude resale transactions, and others will count them as part of their dollar thresholds.
As a result, it is vital for businesses to evaluate their nexus footprint regularly and to understand the implications of new state-level tax obligations. In addition, if a taxpayer discovers that it has nexus with a particular jurisdiction, it should consider participating in that state’s voluntary disclosure program to mitigate its potential liability exposure.
Creating a nexus in a different state
Historically, state nexus rules determined a company’s obligation to collect and remit taxes in a particular jurisdiction. A company’s physical presence — such as employees, offices, inventory, assets, warehouses, and vehicles — was enough to create tax exposure in a particular state. However, nexus rules have changed. With its ruling in a specific case, the Supreme Court established the concept of economic connection. It allows states to require out-of-state sellers to collect sales tax if they meet certain thresholds, such as $100,000 in sales or 200 individual transactions.
As a result of this modification, businesses must now be careful about how they use work policies and remote work tax implications. For example, if employees work remotely from home during the pandemic, their activities may trigger nexus in a different state and create a tax liability. In addition, COVID-19 has shifted the definition of what constitutes a domicile from residence to place of business.
Similarly, businesses that engage in drop-shipping or have agreements with out-of-state vendors could create nexus based on those vendor locations in another state.
Creating a nexus in a different country
Remote working policies became popular during the COVID-19 lockdown and provided companies with previously new flexibilities for staff. However, businesses must understand the tax implications of these new policies. Failure to address these issues could result in hefty fines and penalties for employers and employees.
Traditionally, determining whether you have a taxable presence in a state was relatively cut and dry. If your business had a brick-and-mortar location, you were subject to taxes there. However, the nexus idea has become increasingly complex as more companies utilize remote labor. A corporation’s nexus with a state—its relationship with it—determines whether it must register for the franchise, income, or gross receipts taxes there. Nexus can be based on physical presence, economic activity, factor presence, or registration with the state.
It’s also worth noting that the OECD has stated that remote working due to the pandemic is unlikely to trigger PE, but this may depend on individual local laws. For example, suppose you are hiring remote workers for short periods. In that case, it’s a good idea to ensure that they aren’t being tasked with revenue-generating activities and that you agree they will only be paid for their work in the country where you operate.
Creating a nexus in a different language
The COVID-19 epidemic has hastened the trend toward remote work, and businesses and employees need to be aware of the tax repercussions of this change.
Nexus is a business’s connection with a state, and it determines whether the company needs to pay sales and use tax, income tax, or franchise tax in the form. Historically, nexus was determined by physical presence, but now it’s becoming more common for businesses to create a nexus with a state based on economic activity alone.
With the increase in remote work, it’s essential to understand the tax implications of working from home. By avoiding unintended consequences, you can maximize your comfort with remote work and maximize this opportunity.
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