The demand for remote work options did not start with COVID-19, but the pandemic certainly accelerated its use. Many employers are now actively hiring remote employees, some of whom live and work outside the state where the company has its office. These employers must be diligent in keeping track of where their employees perform their services as the taxation of remote workers is still a new and developing issue.
As employers prepare for a future that features remote work more prominently, they need to understand three critical types of employees (in-office, remote, and hybrid) and the nuanced tax implications each brings.
Once they understand these different groups, employers can take action to develop a remote work compliance policy that fits their needs and capabilities from a tax perspective.
Typically, if all of a company’s employees are based in and working out of the state in which the company operates, the company will only file taxes in that state, assuming it does not have nexus outside the state. However, the physical presence of a single employee working remotely in a state could be sufficient to establish business tax nexus between an employer and that state. If tax nexus is established, the employer may be required to comply with the tax laws of that state and may be responsible for registering for and paying business income and franchise taxes, sales and uses taxes, and other taxes in the state that the employer is not ordinarily accustomed to paying.
“Companies need to decide what they’re going to do with their distributed workforces," says Craig Anderson, C.P.A and Vice President of American Escrow and Closing Company. Those decisions will be impacting companies for years to come".
“State and local municipalities will also be affected due to temporary tax credits expiring, commercial space rental income loss, and reduced individuals patronizing local businesses. As a result, states have become more aggressive in their taxation of remote and hybrid workers."
“Remote and hybrid employees may find themselves having to pay taxes in more than one state if reciprocal tax credits are not offered. If reciprocal tax credits are not offered, employers will have to decide if the company will compensate affected employees for the additional paid taxes or if the employee will have to bear the responsibility of the additional taxes."
Each state where employees work should be studied independently to fully understand the scope, including when the guidance will expire (which varies among the states). The issue of tax nexus and remote work is of utmost importance to states as they face enormous budget pressure resulting from the pandemic.
The proper way to tax employees is also an international issue. Typically, remote workers file taxes with their country of tax residence as determined by their place of principal residence. Digital nomads, however, may encounter different or additional layers of tax residence due to their physical presence in other countries during a tax year.
“Employers should offer some type of tax counseling, domestically and in cross-border moves," says Anderson. Employees that are teleworking need to understand the extent to which they are subject to income taxes to ensure they file proper individual income tax returns.
Anderson will be facilitating a panel discussion to take up this discussion and explore further implications at the Worldwide ERC Spring Virtual Conference May 17-May 19 in a session titled Global Tax Policy.
For more information on the Spring Virtual Conference, click here. Registration is just $150 for the two-day event, and attendees can earn up to 24 total continuing education units for (S)GMS®/(S)GMS-T® and (S)CRP® recertifications through viewing the live and recorded sessions.