Tax Implications of Small Businesses Allowing Employees to Work from Home During COVID-19

For many of our small business clients, allowing employees to work remotely during COVID-19 has been necessary, but we cannot forget the potential tax implications. States, like a lot of businesses, are struggling and looking for new sources of revenue. One of the easiest ways for states to generate that revenue is through "nexus inquiries," which could result in additional income taxes, franchise taxes, sales taxes, and/or payroll taxes for your business. "Nexus" means the minimum connection a business has with a state that allows the state to subject them to its taxes. In most states, having remote workers is enough to create a nexus. So what does this mean for you as an employer?

It depends. Some states, for example Massachusetts and Oregon, have indicated that they are allowing a nexus waiver for employers with remote workers due to COVID-19 - as long as those workers would not otherwise be working remotely, i.e., outside of the state where they normally work. There is an expiration to these waivers; Oregon’s is set to end on November 1, 2020 and Massachusetts’ ends on the earlier of December 31, 2020 or 90 days after the state of emergency in Massachusetts is lifted. Every state is taking a different approach and some have not addressed this at all, but one thing is certain: many states foresee an opportunity for increased revenues due to employees working remotely.

There has been a proposal in the U.S. Senate to provide temporary nationwide relief for employees who are working remotely due to COVID-19, but as of today, nothing has been passed.

Even with potential nexus relief, we all have to face the fact that the “normal” working environment has changed for many due to COVID-19. For a lot of employers, employees working remotely is going to become more of the norm, which will benefit some employers who are working to broaden their potential talent pool. The important takeaway from a tax perspective is to make sure employers stay in front of the potential tax exposures and weigh that into their decision making.

If you're a small business owner and need legal advice, give us a call at 253.858.5434 to see how we can help. We represent clients throughout Washington and Idaho and are available to meet in person (with social distancing protocols in place), by phone, or via video conference.