The coronavirus continues to impact small businesses. Many businesses have chosen to go virtual, either temporarily or on a permanent basis. But that decision can impact the business’s nexus status.
Companies with remote employees in other states may also need to register for foreign qualification, register for payroll taxes in those states, or they may need to start collecting sales tax from places they never have before.
Business Compliance Consequences for Pivoting to a Virtual Company
Many businesses have pivoted to a remote working model to keep employees safe and many may continue to do so for the foreseeable future. The primary concern for these employers is keeping their business going; they aren’t concerned about where their employees live. Therefore, some employees may have chosen to work temporarily or permanently from another state than the business’s home state.
And then there are the businesses that have experienced increased sales and a need to ramp up production during the pandemic. Trades such as the video gaming industry, and those pivoting to essential needs businesses, are still thriving and may need to hire help from another state.
Businesses with employees in another state have now established nexus (a connection) in that state and are required to register for foreign qualification in the state the employee is working.
What is a foreign qualification? Foreign qualification is the process of registering a company in another state in order to conduct business. States vary in what constitutes doing business, but in general, most states consider the following as business activities requiring foreign qualification:
- The business has a physical presence (office space, warehouse or retail store) in the state
- The business conducts in-person meetings with clients or customers in the state
- The business is structured as a limited liability company (LLC), C corporation, or limited partnership (LP)
- The business has employees living and working in the state
A yes answer to any of these questions is an indication you need to file a foreign qualification in that state.
If your business is structured as an LLC or corporation, both are deemed “domestic” only in their state of formation. Therefore, both legal structures are required to foreign qualify in any other state they conduct business in. Foreign qualification ensures the public has transparency about the out-of-state business.
If your business plans to restructure as an LLC or corporation, it’s important to contact the Secretary of State office in the states you conduct business. Every state has its own form, so the details required will be slightly different depending on where you wish to file as a foreign LLC or corporation.
One qualifier about freelance workers and consultants: if the work is primarily conducted online (which is likely), businesses do not need to file a foreign qualification.
In addition, most states do not consider the following activities to require foreign qualification:
- Handling a lawsuit
- Internal LLC or corporate business meetings
- Having an in-state bank account
- Selling services or products through independent contractors
- Securing or collecting debts
- An isolated transaction that is completed within 180 days
For actual employees working in another state, the company must make sure it follows the foreign state’s procedures regarding foreign qualification and registering for payroll status in the state. Failure to foreign qualify can result in significant penalties for your business.
Employing Out-of-state Employees
Don’t fall into the trap of thinking you just need to make out-of-state workers independent contractors.
California’s AB5 law has made it harder and more confusing to classify workers as independent contractors and other states may soon fall in line.
Employing workers in other states requires your business to pay employer taxes in those states. You will need to register with the state tax agency, acquire a state income tax withholding number, get an unemployment insurance number, and withhold income taxes—just as if the employee worked in the home state.
For employees working in states without a state income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming), you are still required to pay the employer’s portion of federal income tax.
Your business also needs to register with the State’s Department of Labor and follow regulations for employees including minimum wage, labor laws, state disability insurance, and worker’s compensation rules. Having a payroll provider goes a long way in making sure all these multi-state rules get followed.
Nexus Due to COVID-19
Even before the pandemic, the U.S. Supreme Court had indicated the in-state presence of an employee doesn’t necessarily give the employer nexus there, although some states do not agree. And now, under COVID-19, many experts feel having remote employees shouldn’t create nexus for concerned businesses. Recently, the Pennsylvania Department of Revenue (DOR) stated it will not seek to impose tax nexus for employees temporarily working remotely because of COVID-19. Also, it will not impose Pennsylvania corporate net income tax.
Pennsylvania is not alone in its thinking. Indiana, Massachusetts, Mississippi, New Jersey, and Washington, D.C. have also stated they will temporarily waive enforcement of certain nexus laws for employees working from home during the pandemic.
Because every state is different when it comes to if and when you’ll need to register for foreign qualification and payroll taxes, you’ll need to do research in every specific state you have employees.
CorpNet™ can help by saving you both time and money with managing business compliance and nexus issues associated with moving your small business into a virtual office. Contact us today to find out more.