Remote Work May Affect the Tax Situation of Employees and Employers

Unintended tax implications could arise for employers with employees working remotely in different states.

Whether by personal choice or government mandate for office closings and stay at home orders, recent studies suggest that about one-half of the U.S. workforce now works from home. An MIT study done in April of this year noted that 34.1% of the American workforce, roughly 56 million Americans, shifted away from commuting to work since the pandemic began. Add that to the 14.6% that were already working remote and almost half the U.S. workforce is experiencing both the benefits of remote work and the tax risk associated with it.

Generally, individuals are taxed in the state they work, not the state in which they reside. Common exceptions to this would be those working in a state with no income tax, or if they reside in a state with tax withholding reciprocity with the bordering state of their employer. In the absence of these exceptions most taxpayers will at a minimum, need to file two state returns. Often the state of residence will allow for a credit for income tax paid to a person’s work state – but not always. In such a case an individual might have dual tax liability to contend with. A very realistic outcome if a remote worker loses reciprocity with a neighboring state by moving away to stay elsewhere with parents, relatives or friends as they wait out the pandemic.

Individuals are not the only casualty to unintended tax situations. Employers can also be greatly affected due to the impact of employees working in states away from established business locations including:

  • Payroll tax withholding for earnings in employees’ home state
  • Registering with states where employer may now have a physical presence
  • Annual reporting, Franchise Tax or Sales/Use Tax obligations
  • State income tax liability
  • Workers compensation and unemployment insurance

Additionally, companies will likely experience increased internal cost associated with tracking employee movement between multiple states for payroll, and the additional costs with more state filings and allocation of earnings for state income tax.

Luckily, we are starting to see some relief from complicated cross-border tax concerns. A handful of states have eased their enforcement efforts by saying that during the pandemic, individuals working from home due to the pandemic, will be treated as if they were still commuting to the office. But unfortunately, there is little if any consistency in the approach states are taking in providing relief. Some might forgo withholding requirements, but not comment on whether nexus (a business’ economic presence) is created subjecting the employer to tax and reporting regulations. Other states like the District of Columbia, Indiana, North Dakota and Pennsylvania have stated that nexus is NOT created due to telecommuters considering the pandemic, but remain silent as to withholding obligations.

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How This Impacts Mobility

The issue of where business is conducted, where employees are working, and understanding which states hold claim to payroll taxes and income taxes from businesses operating in the U.S. has been a struggle for all employers for many years. The current pandemic has highlighted the relative ease of establishing a remote workforce, but it should also signal the need for attention to the complex and varying tax laws that affect our employees as well as our business. As Worldwide ERC® members consider how current conditions may shape their business structure and strategic direction, they too should be cognizant of the new obligations created by an expanding mobile workforce.

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