More and more companies are shifting to remote workforces and sales, and when these activities cross state borders, they can create tax requirements. At Kruze Consulting, we understand that the need for startups to register for state and local taxes isn’t always obvious or easily understood. Not registering properly, however, could result in your startup:
Startups that work with a professional employer organization (PEO) may assume that the PEO has taken care of any state registrations that the startup needs. Typically, however, PEOs do not help startups register in tax jurisdictions. In addition, registration issues with remote employees can cause your payroll to be blocked, either for individual employees or your entire staff.
At Kruze Consulting, we work with startups to determine “tax nexus.” The term tax nexus describes a situation in which an out-of-state business has a tax presence in a particular state or municipal taxing jurisdiction. Nexus applies to all taxes, including sales, income, and franchise taxes. Common situations include:
Specific nexus definitions vary by location. With 50 states in the US containing thousands of municipalities, there is a range of tax nexus definitions involving either a physical or economic presence in a tax jurisdiction. In general, your business will have tax nexus in a location where your company:
If tax nexus exists, then your company has a tax-filing obligation to that jurisdiction, and may owe state income, franchise, or sales taxes. Companies paying wages to remote employees must withhold any state and local income taxes, and pay unemployment taxes, for the employee’s location. Kruze Consulting can help your company determine locations where you have established tax nexus, and help you get properly registered.
If your company has established tax nexus in another state, you need to register your business in those states, often called “foreign qualification.” This process can be complex, and include:
Some states will allow your startup to register online, while others make you file physical documents in person or through the mail.
The process of determining tax nexus and registering in those jurisdictions is complicated and time-consuming. Ideally, your business should conduct a nexus study to understand its obligations in various tax jurisdictions. The tax team at Kruze Consulting can help you review your sales data, assess your employee locations, and determine in which states or municipalities you have a filing requirement. In addition, we can help you negotiate the complex process to register for state and local taxes. For more information, contact us.