Remote work has provided new levels of flexibility and access to talent, but it has also created a layer of compliance complexity that many business owners underestimate. When employees work across state lines, unexpected obligations can often arise, from foreign qualification requirements to multi-state withholding and unemployment insurance statutes. Additional Licensing and permits may also be needed. What may seem like a simple hiring decision can create compliance obligations that often remain unnoticed until penalties or filing requirements arise. Understanding these compliance costs is essential to avoiding penalties.
What is a Foreign Qualification?
Corporations, LLCs, and other business entities are classified as “domestic” in the state where they were formed and as “foreign” in all other states. If your company plans to conduct business outside its home state, it may need to qualify as a foreign corporation or LLC in those states. Remember that corporations and LLCs often have ongoing filing and tax obligations in both their state of formation and any states where they are foreign qualified.
What is a Remote Worker?
According to the IRS, A remote worker can be either an employee or an independent contractor, as the classification depends on the level of control the company has over their work, not their location. Generally, if the company sets hours, provides tools, and dictates how the work is done, the worker is a W2 employee.
NOTE: Independent Contractors (1099) generally do not require an entity to be formed and qualified in that state. It is advisable to consult an employment law expert for assistance.
When Remote Workers Trigger Foreign Qualification Requirements
States look at several factors to decide whether you are doing business in their state. What constitutes doing business is often not clearly defined. Here are some examples:
- If your company plans to do business outside its home state.
- If your company has a physical location, employees, or, in some cases, even a bank account in another state.
- If your employees are regularly working from home in another state, the home office is often treated as a remote business presence in that state. It can be categorized in this way without office space, sales activity, or customers.
- If a salesperson is seeking new or renewed business.
Remote employees might need to pay income tax in the state where they live and work, rather than in the state where the business is located. This means employers should carefully manage multiple state tax withholdings, stay up to date on state regulations, and ensure their payroll systems are properly configured to prevent errors and penalties. Registration for unemployment withholding and payroll taxes is state-specific, and any W-2 employee may prompt the need for registration.
Because the rules can be complex and vary by state, it is wise to speak with an attorney or accountant about your specific situation.
Remote Workers Can Change Your Tax Designation
When a company has employees working across state lines, tax obligations are based on where they work, not on the company’s location. States tax income earned within their borders. In the past, companies managed a single location workforce, but remote work changed that. Now, even one employee working remotely out of state can create a ‘nexus,’ meaning your business is subject to that state’s tax law.
Nexus can be triggered by:
An employee working from home
Sales activity in a state
Delivering services within a state
Having a physical presence, even a small one
Once nexus is determined, you may need to register with the state, file tax returns, and withhold payroll taxes. (mitaxavenger.com)
What are the main industries and activities that trigger foreign qualification?
Hiring a remote worker in a new state can affect compliance requirements in that state, including registering for state income tax withholding, unemployment, and, often, Workers’ Compensation. Foreign qualification is usually determined by where you work and how you generate income. These are some of the most common industries:
- Manufacturing and distribution
- Construction
- Sales
- Hospitality, travel, and tourism
- Professional services such as legal, accounting, and financial services
- Online retail and sales due to multi-state fulfillment centers and warehouses
- Hotels and entertainment with multi-state properties
Being Compliant and the Penalties of Non-Compliance
Maintaining compliance begins with understanding the process for incorporating and qualifying your business. Companies should identify where their employees are based, consult tax or legal experts, register in the required states, and choose payroll systems that handle multi-state compliance. Taking a proactive approach helps avoid costly issues later.
Non-compliance with foreign qualification requirements can result in penalties ranging from penalty fees and loss of legal standing to sue in state courts to personal liability for corporate officers and potential involuntary dissolution of business licenses.
Do You Need To Qualify Your Business in Another State?
Proactively qualifying your entity helps ensure the business remains compliant, but it also entails ongoing responsibilities to maintain “good standing.” This includes maintaining a registered agent, submitting an annual report, and paying applicable state taxes. Remember, corporations and LLCs owe taxes and annual report fees in both the state where they were formed and any states where they are foreign qualified.
Accumera provides nationwide services for foreign qualification, registered agent, annual report, payroll registration, and compliance. If your business is hiring employees in multiple states, our team can help you understand and meet your filing requirements. Contact us for assistance in establishing or qualifying your business.
Resources: IRS, mosey.com, anderscpa.com, mitaxavenger.com
