The past year of the pandemic has resulted in 83% of employers declaring remote work a success. However, remote work also adds tax challenges for employers and employees.
I’ve been working from home as a system administrator full time since last March, and the results have been beneficial; less stress, no commute and no option to waste money in the tavern downstairs at the corporate office, so my spending habits have been positively austere.
I’m fortunate to live and work in the same state as my corporate office. However, someone in my management chain has the unenviable responsibility of keeping track of every day worked, and where he is located, for tax purposes.
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He lives in a different state from where our office is located, and he travels to our regional headquarters in a third state. There are income tax stipulations for each state (the one he lives in has no income tax, while the two he travels to require out-of-staters working there to pay an income tax) so it’s quite a chore for him to keep track of his own whereabouts to keep the tax man happy.
He’s not alone; many employees and their respective businesses are seeing some similar challenges. I spoke about the topic with Greg Vecellio, corporate controller at FloQast, an accounting workflow automation software provider
Scott Matteson: What are the challenges for employers involving tax implications stemming from the pandemic and associated remote work?
Greg Vecellio: The pandemic has created a paradigm shift with respect to remote work. Whereas remote work was once the exception, made to accommodate a few employees, it has become the norm during the pandemic and will likely continue once the pandemic is over.
While it’s nice for an employee to be able to keep their job and live wherever they want, this does present some challenges for a company in the areas of tax and compliance. Having even one employee working from home in a different state creates a physical nexus for tax purposes. This means that a company now becomes liable for income tax withholding and unemployment insurance (and any other local employee or employer taxes), corporate taxes and, if applicable, sales tax (for the latter two this assumes the company hasn’t already created an economic nexus in the state).
The requirements and procedures for completing the necessary registrations vary by state—some registration processes are easy and straightforward, and others are frustrating and time consuming.
The challenges are for the employer to know when and where the employees have moved and to stay current on all the required registrations and subsequent filings. And unfortunately, yes, this applies even if the move is only temporary.
Scott Matteson: What are the tax challenges for employees?
Greg Vecellio: From the employee perspective, the biggest challenge is the potential for double taxation of income. Depending on the various tax laws of the home state and the work state, the employee may find themselves in the position of owing tax on the same income to two different states. Some, but not all, states have reciprocity agreements to avoid this double taxation.
An employee considering a move to another state, whether permanent or temporary, should consult with a tax advisor to understand the tax laws of both jurisdictions and what their potential tax liability as a result of the move looks like.
Scott Matteson: What do you recommend for both scenarios?
Greg Vecellio: Employers need to understand the consequences of having a more dispersed, remote workforce. For larger companies that most likely have either economic or physical nexus in all 50 states, this is much less of an issue. It’s smaller employers that will more heavily feel the burden of the compliance requirements.
Employers need to take the compliance requirements into account when setting their remote work policies. Will they allow remote work outside their home state? Will they limit employees’ ability to relocate to certain states (perhaps only those where they currently have some form of nexus or possibly restricting those that they wish to avoid creating physical nexus in)? Will they only allow permanent moves versus temporary moves?
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Employees must take responsibility to fully understand the personal tax laws of their states and the states they wish to relocate to, especially for temporary moves, as well as their employers’ remote work policies.
Scott Matteson: Are there any situations where some states are better or worse than others in terms of requirements, process, leniency, etc.?
Greg Vecellio: Every state is different in terms of requirements and process. Unfortunately, not all states have embraced technology. Some states require actual ink signatures on the registration forms rather than allowing the documents to be e-signed and submitted online. Additionally, some of these same states require the signature to be notarized. In the normal course of business, this may not seem like a big deal, but the pandemic has added a layer of complexity to getting actual signatures and arranging for notaries to go to someone’s residence.
Even for those states that have embraced technology and allow the registration process to be completed 100% online, some have requirements that they physically mail account numbers and other correspondence to the office rather than generating them online or sending via email. In normal times this is mildly irritating, but during the pandemic when offices are closed this is incredibly frustrating.
Scott Matteson: What about employees who reside/work in/travel to multiple states, such as living in one state, working in an adjacent state, and traveling to another state for work?
Greg Vecellio: This is fairly common in certain parts of the country (employees live in Connecticut or New Jersey and work in New York; employees live in Philadelphia and work across the bridge in New Jersey; employees live in Maryland or Virginia and work in D.C.). Some states have tax treaties (often called reciprocity agreements) with neighboring states, which aim to minimize the double taxation of income with the home state offering a credit for the tax paid to the work state. In the absence of a reciprocity agreement the employee is subject to double taxation.
An employee should be sure to clearly understand the tax rules of their home and work states and the potential for double taxation, if they are contemplating such a live/work arrangement.
To add a layer of complexity, due to the pandemic several states have enacted temporary rules around the income tax treatment of remote employees and business tax nexus policies which apply to tax year 2020 and may or may not be extended.
Scott Matteson: Do you have any suggestions for what the government/tax laws should do to help companies and employees?
Greg Vecellio: The complexity is partly driven by each states’ right to create its own tax laws. There has been talk about legislation at the federal level such as H.R. 7968: The Multi-State Worker Tax Fairness Act, which would restrict states’ abilities to tax non-resident telecommuters. Additionally, there are other proposals floating around Congress that would address the issue of double taxation of income at the state level. In my opinion, some type of federal legislation is probably the best way to go as leaving it up to the 50 states to work this out on their own will result in a patchwork of complex, confusing rules at best and very possibly no change at all.
Scott Matteson: Anything to add on write-offs such as home offices, internet connections, equipment, etc.?
Greg Vecellio: The Tax Cut and Jobs Act suspended the home office deduction from 2018 to 2025. Taxpayers who are self-employed, independent contractors and gig economy workers may still be able to take the deduction.
Scott Matteson: Anything else you’d like to add?
Greg Vecellio: Taxation is a complex topic, and employers and employees should seek the guidance of qualified professionals as they navigate this often confusing world.