The sudden, widespread shift to working from home and “work from anywhere” has been one of the most significant changes to affect the U.S. workforce during the pandemic year of 2020 (and beyond). Some workers might have moved to other states to shelter in place during the pandemic, while some might have traveled and worked in multiple states that are not their usual state of residence for tax purposes. In contrast, others might have made a permanent relocation to other states with different tax requirements.
The tax implications of remote work can present compliance challenges and administrative complexities for companies, and new state tax filing requirements for individual employees. Now that 2020 tax time is here, and as companies plan for their long-term workforce strategies, business leaders need to think about the tax implications of remote work, including navigating possible challenges like double taxation from multiple states and expense reimbursements for home office expenses.
Even after the pandemic, when employees can safely return to the office, many are likely to choose to keep working remotely—the mobile workforce is here to stay. If you’re a business owner whose employees have been working remotely, especially in other states, you might need to prepare for possible tax changes. Based on what we know about the latest legislation and compliance rules, below are a few of the tax implications of remote work that companies and employees need to know.
There are many possible tax implications of remote work for businesses. If your employees relocated to other states, or if the business itself moved its operations to another state, or multiple states, you might have to deal with new state income tax filing requirements or other state-level compliance rules.
Has your business changed location to another state, or are you doing business in multiple states for the first time? If so, you need to know how to define your “nexus,” in order to clarify in which state your business is located for state income tax filing purposes. Depending on how much business activity you are doing in a given state, you might be subject to that state’s tax jurisdiction and tax laws.
Nexus is determined by several factors, including:
- Production activities
- Offices (although simply having an office in a state is not necessarily enough to create a nexus in that state)
Different states have different requirements for determining nexus, and several states have provided relief to their usual nexus requirements. If you have employees temporarily working in those states because of the pandemic, your business might not be considered “located in” those states for state tax purposes, due solely to employee location.
Remote Work Policy
Is your business being proactive or reactive in deciding how to manage a remote workforce? For example, if your employee moves to another state, do you know what that means for you as an employer and a business from a tax and compliance standpoint? Are you willing to accept those ramifications, or are you being caught off-guard?
Ideally, your business should be proactive in developing a remote work policy that manages everyone’s expectations and interests. However, due to the pandemic, many employers might not have had a chance to plan ahead. Some of those employers are now facing unpleasant surprises in their tax, reporting, and compliance obligations.
Try to use this moment as an opportunity to think broadly about your remote work policy, what you want it to look like, and whether you’re comfortable with the possible exposure or additional obligations that it creates for the business. As the pandemic hopefully subsides throughout 2021, it’s time for companies to switch gears from being reactive to proactive on this front.
Reimbursements for Home Office Expenses
Many employers have provided benefits to their employees to reimburse expenses incurred by the employee. Expenses such as office space and furniture, technology, childcare, and employee well-being may be deductible for the business and not includable in gross wages for the employees.
Mobile Workforce Amendment
In February, the Senate passed a Mobile Workforce Amendment that would make a few potentially helpful changes to state payroll or income tax reporting requirements. As of this writing, the amendment is not yet law, but is an example of how the federal government might make helpful changes to respond to the pandemic. These changes include:
- De Minimis Threshold Expanded to 90 Days:The De Minimis Threshold for state tax withholding is expanded from 30 days to 90 days. Meaning that workers can work remotely in other states (where they are not a resident for tax purposes) for up to 90 days without having to owe state income tax in those other states.
- No Nexus or Apportionment Impact from Remote Workers:If employees are working in a non-resident state during the pandemic, this should not affect the business’s nexus or income apportionment for state tax purposes.
- Flexible Withholding:State tax withholdings can continue from employee paychecks as they were before, or workers can choose how to track where they performed remote work among multiple states.
The business community is in favor of this legislation because it will simplify processes for employers, employees, state and federal governments.
Every state has its own tax rules. State income tax filing considerations for remote employees during 2020 include:
- Double Taxation: Depending on how long an employee has been working in another state, they might have to pay state income tax in the state where they live and perform their work, as well as the employer’s state.
- Reciprocity: Some states allow non-residents not to be subject to tax in their employer’s state.
- Home office expenses: Employees who are now required to work from home may incur additional expenses, such as equipment and supplies, when transitioning from their office workplace to their residence. Before the 2017 tax reform act, these expenses were potentially deductible as a miscellaneous itemized deduction. Now, employees earning W-2 wages are not able to claim home office deductions. Some businesses are exploring reimbursement options such as a home office stipend or an accountable plan to combat individual employee costs.
- State tax withholdings during the pandemic: If a newly remote worker is sheltering-in-place during the pandemic in another state, some states allow businesses to continue to withhold income tax for the employee’s tax liability based on the location of the employer, not the location of the newly remote worker.
Developing Long-term Strategies
As we settle into the “new normal,” it’s time to be proactive instead of reactive. Develop or fine-tune your remote working policy. Are you comfortable with the tax compliance exposure that it allows?
Every company’s situation is different, depending on where employees are located, where the business is located for state tax and compliance purposes, and how you choose to support your employees through the pandemic. Reach out to your Aldrich Advisor for specific insights, the latest updates, and strategies for managing remote work tax implications.
Meet the Author
Diana Strassmaier, CPA, CCIFP®
Aldrich CPAs + Advisors LLP
Diana joined the firm in 2018 with almost two decades of experience serving members of various industries including construction, engineering and architecture, manufacturing and distribution, and government contracting. An expert on conducting overhead audits, Diana works closely with government contracting industry clients to offer clarity on how overhead rates work and help them maximize compensation.... Read more Diana Strassmaier, CPA, CCIFP®
- Indirect cost rate (overhead) audits and consulting
- Financial audits, reviews and compilations
- Business and personal tax planning and preparation
- Certified QuickBooks ProAdvisor
- Management consulting
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- Sage Fixed Assets Certified Consultant