This May Affect Your Business Financially
According to one report, between 15 and 23 million people in the U.S. plan to move away from the regions where they currently work. The reasons vary widely, ranging from successful full-time remote work experiences to the wish to get away from crowded and expensive urban environments.
This new arrangement may work successfully for your small business, depending on your industry. That said, there can be unexpected, noteworthy costs to your business, and to the employees, too. So, don’t agree to out-of-state moves until you carefully research the benefits against the expenses.
The Benefits Can Be Significant
In addition to employees who move away, a good plan for distant remote workers can vastly enlarge your hiring area. At some point in the future, finding talented workers may become more challenging, particularly for smaller operations.
If you have a good remote work plan in place, you will likely find that your employees work harder and more productively from home. They want to continue proving to you that they are highly effective, plus they are likely to replace former commuting and socializing times with more work.
While you’re about to learn about the potential extra costs of out-of-state workers, you might also save money on workplace resources — and even potential compensation reductions.
The Tax Costs to Your Business and Employees Can Vary By Location
Employees residing out-of-state will likely pay income taxes within that state; however taxing authorities all have their own rules. In some cases, your company’s state might require you and employees to pay taxes in addition to the state where the employee lives. While this chart may provide some clues on what to expect, it’s best to check out all applicable state websites, or seek guidance from your accountant to ensure no tax-time surprises.
Your bookkeeping software alone is unlikely tell you what you need to know on a timely basis because the rules can change unexpectedly, and they can vary significantly from one state to the next. Just one potential complication: some (not all) states have temporarily suspended out-of-state taxing requirements due to the pandemic, but that suspension can change in a heartbeat.
You and your relocating work-at-home employees need to stay on top of these changes to the minute. The effects can be very real when you suddenly face double-taxation due to the need to pay for the same employee work from two states.
These Tax Issues Do Not Apply to Legally-Defined Contractors
Of course, employee tax issues don’t pertain to contract workers. However, you’d better be really sure that a contractor isn’t really an employee according to IRS tax law. Plus, state law may be stricter in defining “contractor” than even the IRS, depending on your state.
Do you remember the recent California court case involving Uber and Lyft drivers, among others? If so, then you can see how state tax laws can potentially significantly affect the amount of out-of-state taxes that your company needs to pay. California cites the stricter standard for defining contractors (known as the “ABC test”). Their Assembly Bill 5 was approved by the court last July, but it is going through additional litigation
The bottom line is that, if your contractors are defined as employees in any state, then you will have to pay taxes within those states, even if federal taxes remain a non-issue. Just as important, those states are likely to require you to include each classified employee in your full benefits program, as well as providing workers’ compensation benefits and more.
Hopefully, these issues will convince you of the importance of properly classifying every contract employee.
Cost Mitigation May be Possible
It’s never easy to ask an employee to take a pay cut. Still, when an employee’s move is going to add to your expenses, it’s not unreasonable to negotiate a new pay plan. If you start by recognizing their value – and come armed with the facts, you’ll have an easier time finding agreement. Do your homework before that meeting to prepare a convincing argument with information like the following:
- Compare the cost of living between your office location and the area where your employee plans to live. There are plenty of online cost-of-living calculators to provide you with numbers. Plug in the employee’s current salary and location and the new locale to find out, for example, that a move from Chicago to North Liberty, IN will save the employee nearly 30 percent.
- Itemize known savings for the employee. Travel savings can be significant. Based on the distance of their daily commute, itemize specific savings in fuel costs, vehicle wear and tear, and even the headaches of travel time. If you can accurately quantify the costs of maintaining a business wardrobe along with the costs of eating out, include that information, too.
- List the additional costs to your business due to an out-of-state move. You may save some money on office space, but you know that you will pay more in taxes and in complying with the employment laws in the new state. Relocating employees need to know this, too.
- Agree to buy needed equipment and supplies. Don’t expect employees to use their own computers, printers, smart phones, and other necessities. It’s not unreasonable to provide anything that they normally use in the workplace.
Naturally, employees strongly connect their value to their pay — and they’re likely to view that value based on your current workplace location. Your job is to help them to understand that you still recognize their worth, and any reductions that you propose will not affect their standard of living in the new location.
Eyes Wide Open, Please
You may be facing one out-of-state employee move right now, but, over time, that number may increase. With each new state, you — and the moving employee — can face significant complications. In addition to taxation changes, the employment laws may differ greatly from your home base state.
There are always benefits to retaining tax and employment law experts who can tell you how to support each employee in a legal manner. But if you want to try doing it yourself, make sure that you read everything possible directly from the official websites of the new state and your own state, too.
With your eyes wide open, you can help safeguard your company’s wallet from opening wide to pay unexpected penalties down the road.