COVID-19 continues to have a significant impact on how business is conducted for employers. One of the biggest changes we have seen is the shift from working in an office setting to having an entire remote workforce. Although there are many benefits to having employees work from home, remote work has created tax compliance risks for employers. The tax rules can be complicated for business owners as the tax rules not only differ between each state but also from the federal government.
This makes understanding the system overwhelming and it is recommended to reach out to your tax professional for assistance in understanding the rules that are in place and how your business may be impacted.
It is important that employers have a system in place that determines where your staff members work, their state of employment requirements, your own state requirements as a corporation and the tax-paying implications. As a business you should develop a system that keeps track of where your employees are located and create processes for how to handle their taxes.
Most companies have policies in place for their traveling employees but now that a majority of the workforce is doing remote work, there needs to be processes in place for your company’s entire workforce.
Although you may be certain of where your employees reside, please keep in mind you should have a system that continuously tracks your staff. For example, if a staff member chooses to relocate to a different state then your tax position could change. By an employee changing to a new state, you may have new nexus and filing requirements that you wouldn’t have otherwise. Essentially, if an employer has a presence of employees in a state even if an employee is working remotely, the company could find itself subject to the state’s income tax laws.
In 2020, about two dozen states provided grace periods for organizations with teleworking employees so they wouldn’t be burdened with paying additional state tax obligations. Now that COVID-19 restrictions are being lifted, states are returning to their normal requirements and the nexus safe harbors are expiring. This means companies need to be aware of their new state tax obligations due to allowing their staff to work remotely.
Lawmakers have attempted to address the discrepancy issue between states for remote workers, but haven’t passed anything at this time. The “Multi-State Worker Tax Fairness Act” has been proposed over the last decade attempting to create uniformity for mobile employees. Unfortunately, the act still didn’t get passed during the pandemic, however, as tax compliance becomes a bigger burden at the state level, it is possible that lawmakers may address the problem again.
Although having remote employees has multiple benefits such as increasing employee satisfaction, reducing real estate costs and increasing productivity, employers are now taking on increased tax compliance costs.
As you decide to have more remote workers in your company, it is recommended to discuss the risks that you will be taking on with your accountant so that you are fully aware and prepared for the potential compliance and filing burdens.
If you are considering changing to a remote workforce, contact me today at 310-534-5577 or [email protected] as I’d love to answer your questions.
