Live In One State, Work in Another
Q. I work for a business located in NM, but have worked from home for more than 4 years, until recently my home office was in NM. I just moved to CO. I am still employed by the NM business and still work from home in CO now. My employer is saying they can't withhold CO taxes because they are not registered (incorporated) to do business in CO so they say I will need to become an independent contractor in order to stay 'employed'. Can they just withhold NM taxes still and can I file in NM and CO since I am doing work for a NM business?
A. Working from home is an awesome choice if you have the ability to do it and can stay motivated. Working from home in a different state than your employer is physically located becomes a challenge for most smaller employers. You brought up several issues that can create a potential problem.
The main issue in your scenario is nexus. By definition this is simply business presence. When you and your employer were both in New Mexico, the situation was easy. You simply withheld New Mexico tax because the business is physically located there as well. The situation becomes cloudier when an employee is no longer in the same state as the employer. If you are doing the same work in Colorado as you were in New Mexico, your employer cannot simply call you an independent contractor to avoid withholding. Contractors are self-employed individuals who maintain all the risk of the business endeavor. If you offered this service to many different companies, you may be able to fall into that category.
When you moved to Colorado and continued working for your present employer, you technically created nexus in Colorado for that company. Because you are no longer performing services in New Mexico, your employer needs to stop withholding New Mexico tax and paying New Mexico unemployment tax on you. Both of these taxes should now shift to Colorado if your services are being performed there. That means they have a business presence in Colorado because you are physically located there. This also means that company could be liable to collect sales tax, pay property, income and unemployment tax and withhold Colorado tax from your paycheck.
When companies make the decision to relocate an employee into another state, there should be a big discussion if the company does not already have a business presence there because of the reasons mentioned earlier. If it makes business sense for an employer to begin operating in a new state, companies may do it anyway and file for the necessary tax accounts. By you moving to another state, you have created this problem for your company. If you are truly an employee, you may not be re-classified simply to avoid the new tax obligations. However, if your employer wants to continue utilizing your services, you have just caused him/her a lot more work. If it is too much hassle, you may have placed your job in jeopardy.
These free resources should not be taken as tax or legal advice. Content provided is intended as general information. Tax regulations and laws change and the impact of laws can vary. Consult a tax advisor, CPA or lawyer for guidance on your specific situation.