Beyond employment taxes and payroll: Are your remote workers triggering a corporate tax risk?

Remote workers have been on the rise in a post-COVID environment, with many companies leveraging remote working to incentivise and attract top talent. For companies with a US presence, that can also mean employees may be scattered across one or more states. Dealing with a myriad of federal and state employment taxes and payroll can be burdensome, especially for companies with a limited US presence.

The rise of remote working has seen a boom in the need for firms to handle all employee-related matters, from employment taxes, payroll, medical insurance, unemployment taxes and beyond. Employers of record (EORs) and other similar arrangements enable companies to outsource the typical employer responsibilities to an EOR whilst allowing the contracting company to retain control over the worker. The EOR acts as the legal employer of the worker; though the day-to-day business activities are monitored by the contracting company.

Whilst EOR (and similar) arrangements provide significant benefits by taking on the burdens of payroll, employment taxes, benefits, etc., having US-based staff can trigger a US taxable presence for the contracting company. In particular, where a non-US company is the contracting company, the EOR arrangement could trigger both federal and state income tax filing and payment obligations for the non-US contracting company.

The risk of creating a taxable presence is increased in the following scenarios when performed in the US:

• Where the contracting company is tax resident in a non-treaty country (e.g., UAE, Guernsey, Jersey, most East Asian countries and more).
• Where the US-based staff work from an office or fixed place of business (potentially including a home office).
• US-based senior leadership/key personnel.
• Undertaking key income-generating activities.
• Materially participating in customer contract negotiations and/or concluding customer contracts.

If a US taxable presence is triggered, the non-US company may be required to annually file a federal income tax return and potentially pay US federal income tax. In addition, the non-US company may be required to file (and pay) income tax at the state and local level, potentially in more than one state.

Risks of inadvertently triggering a US taxable presence can be costly and may include federal and or state audits (which could attract interest and penalties) as well as due diligence findings as part of an exit/equity raise which could result in a price chip (or even worse, a failed deal).

EOR arrangements continue to provide a practical solution to streamline hiring US-based workers. Through proactive structuring and planning, the taxable presence risk can be managed and/or ring-fenced. We are here to help companies navigate the potential pitfalls; so if you need help evaluating your existing structure or if it’s your first foray into the US, reach out and see how we can help.