Whether fully remote or hybrid, distributed teams have become the norm for most of our nonprofit and association clients. For those who have made the shift in recent years, formalizing employment arrangements for remote team members can get tricky. There’s no way to sugarcoat it; establishing compensation best practices and tax law compliance for a distributed workforce is complicated. And can open the door to legal headaches.
While we don’t have solutions for you (hint: that’s what your friendly lawyers, HR consultants, and accountants are for), we thought sharing some of the challenges we’ve seen might be helpful.
Benchmarking Compensation: Here, There, or Everywhere?
The question of how to pay employees fairly and remain competitive in the job market while managing budget constraints has become that much more complex with distributed teams.
SmithPilot compensation expert Rebecca Pilot suggests the following options for DC-based organizations (this works for other locations too):
Benchmark against where the employer’s headquarters are located. Anyone hired will get DC-based pay regardless of where they work or live.
Benchmark against the national average and set all pay to national levels regardless of where they work or live.
Start with one of the first two, then apply a regional adjustment based on the cost of labor depending on the candidate’s location. For example, if they’re in San Francisco, the pay range would be increased, and if they are in Oklahoma, the range would be decreased, based on the cost of labor in those locations.
According to Idealist research published by the Council of Nonprofits, most nonprofits are going with the first option, “an average of 73 percent of positions were compensated based on the employer’s location, while about a quarter were paid based on employee location.”
The Idealist researchers add that “Job seekers who live in locations with a lower cost of living may be attracted to remote jobs with higher salaries than can be found at local organizations.” Which is good news for DC-area nonprofits and associations conducting national searches, widening the pool of potential candidates.
There may be good reason why fewer organizations benchmark by employee location. A Fast Company article outlined some pitfalls of this approach, noting that the practice rewards location over merit, works against inclusive and equitable hiring policies, and can create recruiting and hiring challenges in the long term. Applying a regional adjustment (rather than using location as the primary determining factor) may mitigate those concerns. But they are important to consider when deciding what’s right for your organization.
Your State Taxes or Mine?
Imagine this scenario. Your office is in New Jersey, and you want to hire an employee who lives in Florida. They will primarily work from home but make monthly trips to NJ. Which state’s taxes will the employee need to pay? According to NJ state tax laws, it depends on where the work is being done and how many days are worked in each state. And every state is different.
Here’s where understanding the concept of employment tax nexus is crucial. Nexus is established when an employer has enough connection to a state to be subject to its employment tax laws. According to a Tax Adviser article shared with us by Lorraine Sexton, CPA of Snyder Cohn, “Generally speaking, a remote employee will create nexus for the employer for tax purposes.”
Nexus can create filing requirements for income tax, gross receipts tax, sales tax, and local tax purposes. When employers have a remote employee, they must also address employer income tax withholding requirements and unemployment tax rules. And state tax laws and reporting requirements vary.
It’s important to keep up to date with state tax requirements as the state tax laws are constantly developing and changing.
Lorraine Sexton, CPA
When Does Travel Become a Commute?
A commute is the regular travel between an employee’s home and the workplace. Employers are not legally required to reimburse commute expenses. But some states and cities require employers to reimburse “necessary” work-related expenses.
Suppose an employee lives and works remotely in North Carolina but travels to your office in DC to work occasionally. Is that considered a personal commute (employee’s responsibility) or a necessary work-related expense (employer’s responsibility)?
And who pays taxes on what, when? Whether travel and other work-related reimbursements are tax-deductible on the part of the employee or employer varies by state too.
The commute vs. travel expense question is just one part of the bigger picture. For remote or hybrid teams, there is also the question of who pays for internet, office supplies, equipment, etc. And how to ensure equity among employees with varying work arrangements.
How you address these questions for distributed teams may depend on your budget and current benefits, but there may also be legal considerations. An employee benefit or perk in some states may be legally required in another.
When in Doubt, Turn to the Pros
As an executive search firm, we see many organizations wrestle with issues like these because they impact job market competitiveness and employee retention. And while we don’t have the answers to these deeply complex and evolving issues, we know from experience that the best way to ensure compliance, transparency, and fairness for all of your employees is to engage the experts.
Call up those friendly lawyers, HR consultants, and accountants, and let them do what they do best. You’ll be moving to safeguard your organization’s future while realizing the potential of remote work.