Hiring and taxes: Having an employee changes everything

Headshot for Amanda Graber, Content Marketing Specialist for ComplYant, a business tax tool for entrepreneurs and small businesses.
By Mandy Graber

It’s no secret that an extra pair of hands can help your business grow and make everyday business tasks easier. However, just having an employee can mean major changes to how you’ll file your taxes. Make sure you’re off on the right foot by checking out how having an employee can affect your taxes.

Hiring an employee is a rite of passage for many small business owners. An extra pair of hands is often ultimately beneficial to a business. However, there can be a lot of upfront effort needed to onboard, train, and set up initial tax paperwork.  

A good employee is worth the strife. Just remember that the effects of hiring don’t end with payroll taxes. There are some other tax considerations you’ll want to keep in mind to ensure you’re not surprised by bills, penalties, and fines. A little bit of planning can save you money and headaches. 

Creating a sales tax nexus  

You may hire an employee who works remotely in another jurisdiction. If you want to expand your market, you may hire a sales rep to travel and represent your business at events across the country. In either of these scenarios, you may trigger a sales tax nexus.

Of the 46 states with a sales tax, standards apply differently. Some don’t impose any tax until a minimum number of transactions or sales have been met. Other states have regulations establishing a nexus merely by attending a trade show. To be safe, you’ll need to check all jurisdictions where your employees live and do business. You'll want to comply with local regulations.

Location matters

Things can get a little messy if your employee lives out of state. This could be true if your business is located near the state line or your employees work remotely. As a general rule, you’ll withhold taxes where the employee works. If your business is located in New Buffalo, Michigan, and your employee takes the commuter train from Indiana, you’ll withhold taxes for Michigan. However, you would withhold Indiana taxes if your employee works remotely from Indiana. 

You’ll also want to do some research in temporary circumstances. Let’s say the same employee is sent to another state for six months for training. Depending on the regulations, you might have to withhold taxes for the state the employee is working in. In some states, you would have to withhold taxes even if they only worked there a single day.

Seven states don’t have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Other states have tax reciprocity. This means they allow employers to withhold taxes for the state of residence instead of employees’ work states. Some of these reciprocal agreements are conditional and are only honored for certain other states. You’ll want to investigate to be sure you’re following regulations correctly.   

|Employees can have a big impact on your business– and your taxes. Doing your research can save you headaches and may save you money.

Credit where credit is due

Some employees and some circumstances can qualify employers for tax credits. It’s worth the effort to stay up-to-date on these requirements and see if any of these programs may apply to your situation. 

One commonly known tax credit available to employers is the Work Opportunity Tax Credit (WOTC). This federal tax credit offers an incentive to employers who hire individuals from marginalized groups who often face significant barriers to finding a job. A similar tax credit is available for small businesses that hire employees with disabilities.  

Under the CARES Act, some small businesses may qualify for an Employee Retention Credit  (ERC). The ERC is meant to benefit employers who continued to pay employees during the COVID-19 pandemic. It can also help those who had significant declines in gross receipts from March 2020 to December 2021. 

If your business offers health insurance, you may qualify for the Small Business Health Care Tax Credit. Some states also offer their own tax credits, such as their own variations of work opportunity programs. Be sure to check with your own state to see if you qualify for any local incentives.

Tax is complicated, but you don’t have to figure it out alone

Business tax is complex, to say the least. ComplYant makes it simple. Check out the webinar, Don’t Forget to Pay Yourself, to get insight into paying your employees and yourself. It’s a great place to start if you’re still navigating payroll taxes. 

To manage all your licensing and tax obligations, it’s vital to stay organized. That’s where ComplYant’s platform can help and even send reminders customized for your business, so you never miss a deadline. Sign up for a free account now.

Headshot for Amanda Graber, Content Marketing Specialist for ComplYant, a business tax tool for entrepreneurs and small businesses.
By Mandy Graber
Mandy is a seasoned content creator with experience in a wide variety of industries. She works alongside our ComplYant Tax Experts to help make tax-related content more accessible to everyone. In her long tenure as a writer and content creator, she has covered a wide array of topics, including insurance, education, financial technology, and more.

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