Professional service companies have the opportunity to leverage the best talent today and expand their presence and offerings all over the country and world. They can leverage cloud based tools to standardize the way their business works, and allow them to run their business from anywhere. However, what they often don't realize is that while they are expanding their opportunities, they are also expanding their footprint (aka Nexus) in regards to state, local, and in some cases global compliance. Hiring someone in a new state could mean multiple things, including registering as an employer in that new state to obtain proper ID numbers, and tracking revenue in that state for income tax allocation purposes.
Doing this the right way from the beginning makes life a lot easier than attempting to retroactively properly allocate revenue by state or trying to clear things up with the state or local payroll departments. There are also other benefits to tracking these details while trying to grow and scale your service based company.
In order to scale a remote workforce, a professional service company needs to take into consideration what that will mean from a compliance standpoint, and also how they will manage and oversee their staff, clients, and projects as they grow. You cannot be in control of everything as you grow, but it becomes easier to delegate when you have standardized cloud based systems and procedures in place that you can monitor in real time. Below are some common compliance factors you should be aware of, as well as example solutions to automate processes and help stay in compliance.
Factors that affect Nexus and local compliance
- Hiring an employee in a new state
- What you need to register for - State income tax withholding, unemployment, state or local city factors, every state is different in term of requirements.
- What duties will they perform? - Depending on the state this could affect minimum wages, the need to file annual state income tax or other state filing requirements, and more.
- What about benefits and other employee onboarding considerations? - Your benefits package may not be available in the new state, and other employee contracts may be unlawful or be deemed unenforceable based off local state statutes.
- Generating service revenue in new states
- Depending on the state and the type of services you provide you may be required to track and apportion income to particular states as part of your annual income tax filing.
- Select states and cities will also require that you collect and remit sales taxes (especially if you sell goods along with your services), or require gross receipts returns.
- Registering in a new state
- Once you have done the research and register for your ID numbers in a new state you'll want to make sure you incorporate these into your payroll system
- Registering in the state could mean multiple things. There are business registrations, employer registrations, unemployment systems, and it varies.
- You'll want to make sure you register for all things that are applicable, including exemptions in some cases, to avoid surprises letters or assumptions from the state or local departments. A proactive phone call to the state agency can help.
- Contractors vs employees
- The rules on this are also vary state by state. Meaning a job responsibility that may qualify as a contractor in one state, may have to be treated as an employee in another.
- How you manage, compensate, and hire help may completely change as you expand into new states.
- New federal statutes will dictate how you compensate for overtime, even for salaried workers. This will go into effect in December 2016, and is something that will affect a majority of employers in the U.S.
- Hiring abroad
- This presents a whole other set of questions and should be discussed with your tax expert. There are tax treaties, foreign tax credits, and all different layers of compliance and tax treatments for companies who have a global workforce.
Keeping up with the changes and research required to stay compliant with state and local authorities can be daunting and open you up to risk. It is also not a great use of your time, so it is best to have a resource to turn to for the advice you need as you expand, and tools and practices established to help make it easier on you, your team, and your new hires.
Tools to to promote automation, visibility, best practices, and compliance:
- Payroll and Onboarding - You shouldn't be stuck in the 20th century manually processing your own payroll taxes, and you need an easy way to onboard employees. A few of the solutions we use to automate payroll and streamline onboarding for our clients are Gusto, Zenefits, and ADP. This is just a short list, but the purpose is to have an easy way to run your payroll, standardize onboarding new staff with a pleasant and easy experience, make sure taxes and filings are handled (including new state and local compliance you may be subject to), and that it syncs with other tools, including your accounting system.
- Project Management and Time Tracking - As you grow, you will more than likely need to adopt a project management software. This will allow you centralize your business in the cloud with all customer and project details, routine processes for starting and assigning different job types, measuring budgets vs. actuals and staff capacity, and reporting on and controlling all the things that are important to you now that you can't do it all yourself or watch over your staffs' shoulders. Project management solutions require time and customization, but can have a huge impact on your ability to oversee and manage the business. A few project management tools we have used and integrated for clients are WorkflowMax, Harvest, Accelo, and other industry specific tools. Another consideration is what other tools you use (CRM, time tracking, accounting, payroll, etc.) and how they will fit in or could be integrated with a project management solution. At the very least, you should have a time tracking solution in place to automate paying employees, billing customers, and also to help stay in compliance for overtime requirements (especially with new FLSA regulations). TSheets is a great example of a simple cloud based time tracking solution with a lot of automation.
- Accounting for it all - When you invest in cloud based solutions to automate other parts of your business, you'll want a system that can capture all the financial impacts of your day to day operations, enabling you to better manage the finances and things like project profitability. Also, you'll need to record things correctly for compliance factors, like allocating revenue by state to apportion income taxes correctly. Xero is our go-to solution when it comes to the accounting system. It is cloud based and available on mobile, and it syncs with 100's of tools so that real time and highly relevant information only has to be entered once (like job codes or location tracking). This is where all of your customer invoices, payments, payroll, bills to pay, and everything else hitting your financials will get tied back to the bank and reported on. When all the relevant information for tax and compliance purposes and managing your finances gets automatically synced, it is a lot easier to plan for taxes, file on time, avoid penalties, and make informed decisions about growing your company.
There are a lot of tools out there to help automate processes and keep businesses in compliance and in the know as they grow. However, just like researching state and local compliance, finding, adopting, and integrating a scalable solution is not an easy task.
If you are thinking of expanding into new states, or want to invest in a cloud based solution to run your professional services company, a good place to start is by speaking with a company that specializes in the tools you are exploring and can keep you in compliance.
In the upcoming webinar on October 24, 2016, HPC’s CEO Bruce Phillips and Director of Tax, Laura Ring will discuss when to collect sales tax, U.S. Nexus, how much sales tax to collect, and how to stay compliant.
- Discussing U.S. Nexus and how to know when and where to collect sales tax
- Paying or collecting and remitting certain taxes when a state requires it
- What you should know about being a remote seller, making sales in other states, and certain thresholds you should look out for
I hope you can make it and look forward to your questions. If you can't attend, please register anyway to receive a recording of the webinar via email.
HPC provides custom back office solutions and we have helped countless companies make the transition to the cloud, as well as providing advisory services to help them grow and stay in compliance. Click the button below for a free 30 minute discussion to explain your needs and hear what a complete cloud based solution could look like for your business.