Remote and hybrid work have become standard for many professional services firms, offering flexibility but also creating state tax obligations that may not always be top of mind.
One of the key concepts to understand is nexus, or the level of connection that creates a tax obligation in a state. With remote employees, that connection can be established more easily than many companies expect.
Physical Presence Still Drives Nexus
Many companies are familiar with economic nexus, which is based on sales activity in a state. However, a common misconception is that economic nexus replaces physical presence. In practice, both still apply.
A single employee working in a state can be enough to create nexus for both sales tax and income or franchise tax purposes, even if that employee is not involved in revenue-generating activities. Administrative and support roles can still establish that connection.
This is particularly relevant for professional services firms, where teams are often distributed across multiple states, and employees may relocate without changing roles. In these situations, firms can create new filing requirements without realizing it.
Sales Tax Considerations
From a sales tax standpoint, having an employee in a state may require a company to register and begin collecting and remitting tax. In addition, companies need to consider economic nexus thresholds, which are typically based on sales volume in a state. Many states use a threshold of around $100,000 in annual sales, although the rules vary. For a state-by-state breakdown, see our economic nexus chart.
The key takeaway is that both standards apply. A company may meet an economic threshold, create nexus through physical presence, or both, and each should be evaluated.
Income and Franchise Tax Impact
Remote employees can also create income or franchise tax nexus, depending on the state. In many cases, the presence of an employee may be enough to require a company to file a return, although the specific rules vary by jurisdiction.
For professional services firms, this often arises when employees work from different states on a long-term basis or relocate while continuing to serve the same clients. Even a single employee can trigger a filing obligation depending on the state.
Given these variations, firms should take a closer look at where their employees are working and how that aligns with their current filing positions. Firms should also consider how apportionment and local tax obligations may be affected when employees are working across multiple jurisdictions.
Common Pitfalls
Many of the challenges companies face stem from a few common misunderstandings. Some assume that remote employees do not create nexus, while others focus only on economic thresholds and overlook physical presence. In other cases, companies are simply not tracking where employees are working, making it difficult to assess their exposure.
These gaps can lead to missed registrations, unfiled returns, and added complexity down the line, and are often identified during the due diligence phase of a potential transaction, where they can create delays or additional scrutiny.
Steps To Stay Ahead
Firms can reduce risk by taking a more consistent approach to monitoring their footprint. This includes tracking where employees are working, reviewing both physical presence and sales activity by state, and checking registration and filing requirements on a regular basis. Even a simple, recurring review can help identify issues before they become larger problems.
Your Guide Forward
If your workforce spans multiple states, it may be worth taking a closer look now to understand your exposure and next steps. Cherry Bekaert’s State & Local Tax team can help you assess how remote employees may be affecting your nexus footprint and identify any resulting filing requirements.
