How Remote Workers Affect Your Nexus And Tax Filings

Since 2020, the appeal for remote workers has become increasingly popular. You can find talent an hour away or even across the country. But something employers might not know is that hiring people from outside of where your business operates can create what’s called a “nexus”. This means that when you hire someone from another state, your business has a taxable presence there. Depending on the state, there are rules and regulations from a tax standpoint that must be followed.

Different States, Different Rules

Each state may have different interpretations when it comes to remote working. Some states are more aggressive, like California and New York, which consider even one remote employee to create a nexus. Other states tend to be more lenient, focusing on the amount of income earned or property used within the state.

Due to the varying differences by state, it’s important to research state-level tax thresholds within the state your employee lives. Some things your business may need to do once your presence has been established:

• Register with the state as an employer or foreign LLC
• Withhold state income taxes from your employee’s paychecks
• Pay state unemployment insurance or payroll taxes (depending on state)
• File business income tax returns (depending on state)

If your business has nexus in several states, you may have to pay an apportion income based on income earned. Typically that’s determined by dividing your business profits between states based on factors such as payroll, property, or sales.

For example:

• Your LLC is registered in Florida
• You have one remote employee in Ohio
  • You may have to file an Ohio state business tax return for income sourced to that employee’s work

Another example:

• You run a Delaware LLC and hire a marketing employee who lives in Texas and an accountant from California:
  • Texas: No state income tax, but you may still need to register for unemployment taxes
  • California: Requires registration for withholding, unemployment, and may trigger state income tax filing for your LLC because of nexus

Even though your LLC doesn’t “operate” in that state, your employee is an extension of your company – connecting you there to tax purposes.

Independent Contractors vs. Employees

If your remote team members are independent contractors, your LLC generally doesn’t withhold state taxes, but it still matters where they’re located. Some states consider hiring local contractors as a nexus trigger, especially if they perform ongoing work that contributes to your revenue. You may also need to issue Form 1099-NEC for payment over $600, and comply with state 1099 filing rules.

Tips to Stay Compliant

Now that you may have a better understanding of how taxes apply with remote workers, let’s run through some ways to stay compliant. The last thing you’ll want is to hear from the state about your failure to comply.

1. Track where your team works from
2. Check nexus thresholds for each relevant state
3. Register as a foreign LLC or employer where required
4. Work with multi-state payroll provider that handles state-specific withholdings
5. File state tax returns and apportion as necessary

For employees (not independent contractors), your LLC is required to:

1. Register for a state withholding account
2. Register for state unemployment insurance (SUI)
3. Withhold and remit taxes based on your employee’s work location (not where your company is based)

Even if you aren’t aware of filing requirements, you could be subject to penalties and back taxes.

New Territory for Businesses

Remote work gives businesses incredible opportunities for flexibility and team growth – but it also creates a complex state tax footprint. Hiring someone from another state may sound simple at first, but once you look into the specifics there are steps that need to be completed to avoid complications. If your team spans across the country,