State Tax Implications for Businesses Adopting Four-Day Work Weeks

So, your company is thinking about making the leap to a four-day work week. That’s fantastic. The potential for happier employees, lower overhead, and a killer recruitment edge is real. But here’s the thing everyone forgets to mention in those glowing trend articles: your state taxes might get a little… complicated.

It’s not just about paying people for 32 hours instead of 40. The shift ripples out, touching everything from how you calculate corporate income to where you owe payroll taxes. Let’s dive into the state tax maze you need to navigate.

Where Your Business Lives and Works: The Nexus Headache

First up, nexus. It’s a dry tax term for a simple idea: the connection between your business and a state that requires you to file and pay taxes there. Traditionally, having an office or employees physically working in a state creates nexus. But with a four-day week, employee location can get fuzzy.

Imagine you’re based in Texas but have a fully remote employee in Colorado. On a four-day schedule, are they working from a cabin in New Mexico for a week? Suddenly, you might have a tax filing obligation in a new state. States are hungry for revenue, and they’re paying attention to where remote work happens.

The risk? Creating accidental nexus. If even one employee performs work from a different state on their off-day Friday—checking emails, taking a call—some states could argue you now have a tax presence there. It’s a gray area, but an audit risk you can’t ignore.

Payroll Tax: The Withholding Wild Card

This is where the rubber meets the road. State income tax withholding is based on where the work is performed, not where the company is headquartered. With a compressed schedule, employees might be more likely to work from other states—a long weekend at a family home, a working vacation.

You need clear policies. If an employee works their four days from a different state, you must withhold that state’s income tax (and possibly local tax!). The administrative burden spikes. You’ll need systems to track work location, especially in a hybrid or fully remote four-day model.

Corporate Income Tax: The Apportionment Puzzle

For businesses that pay state corporate income tax, how that profit is divided among states is called apportionment. Most states use a three-factor formula based on property, payroll, and sales. Your move to a four-day week directly impacts two of those.

Payroll Factor: This is often based on wages paid in the state. If your four-day policy leads to hiring remote talent in lower-wage states, your payroll cost—and thus your tax liability—might shift from one state to another. Honestly, it can be a strategic lever, but you have to know you’re pulling it.

Property Factor: A successful four-day week might mean you need less office space. If you downsize your physical footprint in, say, California, and your employees work from home in other states, you’re effectively moving property value out of high-tax jurisdictions. That can be a win for your apportionment math.

Unemployment Insurance (SUTA) Considerations

State Unemployment Tax Act (SUTA) rates are experience-rated. Your layoff history influences your rate. A move to a four-day week is rarely a layoff event—it’s usually a reduced-hour arrangement with the same pay. But if you do structure it as a pure 32-hour work week for hourly employees, their reduced hours could, in some states, potentially make them eligible for partial unemployment benefits.

An increase in claims? That could drive your SUTA rate up in future years. It’s a subtle, long-term implication many miss.

Potential State Incentives and Credits

It’s not all risk and complication. Some states actively encourage alternative work models. You might find—and this is worth a deep dive with your accountant—opportunities for tax credits related to:

• Workforce development: If your model includes training on the “off” day.
• Energy conservation: For reducing your commercial energy use by closing an office an extra day.
• Traffic reduction: Some municipalities or states have credits for programs that reduce commuter traffic.

These aren’t universal, but they’re worth hunting for. A proactive chat with your state’s economic development office could uncover surprises.

A Practical Checklist for Your Transition

Okay, so what do you actually do? Here’s a starter list. Think of it as your pre-flight check.

1. Audit Employee Work Locations: Know where your people are actually working, not just where they’re hired.
2. Update Your Remote Work Policy: Make it crystal clear. Require employees to report any work from a new state, even for a day. This protects you from accidental nexus.
3. Consult Your Payroll Provider: Can your current system handle multi-state withholding for a mobile workforce? If not, it’s upgrade time.
4. Model the Corporate Tax Shift: Run the numbers with your tax advisor. How might apportionment change? Could you save in a high-tax state?
5. Check In on Local Taxes: Don’t forget cities and counties with their own income or business taxes. A four-day week might change your local footprint, too.

Look, the four-day work week is a bit like remodeling your house. The vision is beautiful—more space, better light. But once you open up the walls, you find wiring and plumbing you didn’t account for. State taxes are that hidden plumbing.

Plan for it. Get a professional to look at the blueprints. The payoff—a sustainable, attractive business model—is absolutely worth the effort of navigating the tax code’s twists and turns. You just have to go in with your eyes wide open.