Why Good Deeds May Not Go Unpunished
In our last article—”Here’s How Remote Workers Will Impact Your Taxes”—we discussed the potential tax impacts on employees working remotely. Now, in this follow-up to that article, we’re looking at how employers can be affected by hiring remote employees from other states. I’d like to illustrate the problem by posing the following scenario:
José runs a software company in Texas called ABC Software and employs several developers remotely. One such employee, Carol, works out of her home in New Jersey. The only connection between José’s company and the entire state of New Jersey is that it employs Carol. ABC neither generates sales nor solicits business in New Jersey, and has no offices there.
Initially, José supplied Carol a laptop computer. But, at some point, Carol bought her own laptop and started using it instead. Carol’s day started at 9am and ended at 6pm, and she would receive assignments through email and telephone. Her work projects were electronically integrated into ABC’s products. Around tax time, ABC would file documents with the State of New Jersey, withholding a certain percentage of Carol’s income. Other than this, ABC did not register to do business in New Jersey, did not pay any corporate taxes to New Jersey, and did not file any tax returns in New Jersey.
So, the question is, does ABC have any obligations to the State of New Jersey by virtue of employing a single employee in that state?
The answer, as you might have anticipated is, well, yes.
New Jersey, Old Story
That scenario is comparable to an actual case, Telebright Corp v. Director of Taxatio, which came before New Jersey’s tax court in 2010. Telebright was a Maryland company that had not generated a penny of revenue in New Jersey, nor was it soliciting in that state. The State of New Jersey asserted that Telebright nevertheless presented a sufficient “nexus” to New Jersey, by virtue of employing a single, remotely working software developer. Because of this one person, the company was considered to be “doing business” in that state.
Therefore, Telebright was not only obligated to register as a New Jersey business, but was also obligated to pay New Jersey franchise taxes.
In making its decision, the court partially relied on a New Jersey statute that provided a multifactor test. This test included the factor of whether a business was “employing” workers in New Jersey. And yes, the court observed that the employee was indeed receiving and performing her assignments in New Jersey.
Notably, the court expressly pointed out that where the employee may reside is “immaterial to the analysis.” The important issue was that the employee was working in New Jersey. As additional support for its holding, the court also pointed out that the worker was, for a time, working on a laptop provided by the Maryland employer. This means she was “employing property in New Jersey,” further supporting a nexus between the employer and that state.
Remote from work, not from risks
The Telebright decision spawned some speculation on whether employing a single person remotely was sufficient under all circumstances to render the employer “present” in the host state. For example, one commentator asked what would happen if the employee performed purely administrative tasks, like entering financial data, as opposed to software services essential to the development of the employer’s product. Would the outcome have been different?
As the issue of what constitutes “doing business” may vary from state to state, the Telebright decision is not binding precedent elsewhere. Nonetheless, this oft-cited court case should give employers good reason to consider the business risks associated with hiring workers remotely from out of state.
Apart from potentially being exposed to new taxes and administrative costs from additional state filings, there’s another issue. The rules around governing how much wages should be withheld from remote employees can be quite complicated. As I related in the last article, some states, like New York, have “convenience rules,” which hold to the position that an employee working remotely in another state must still pay New York taxes. These rules set up a potentially difficult situation for the employer when trying to calculate the amount of withholding required.
It should be noted that, during the height of the Covid-19 pandemic, many states eased regulations that had imposed obligations on remote workers and their out-of-state employers. However, as the pandemic fades it is expected that these protections will be lifted. Again, the extent of this easing depends on the state, but the general trend is that the tax and administrative burdens associated with maintaining an out-of-state workforce will become more substantial as time goes on.
It may seem nonsensical, but employing even a single remote worker out-of-state could visit additional costs and taxes upon the employer. Whenever considering this type of arrangement, the employer should first consult its tax advisors to find out what its obligation to the host state may be. “Good-Guy benefits,” such as being able to work remotely, are often afforded to prized employees. They should be considered carefully in this light.
As the saying goes, oftentimes, good deeds do not go unpunished.