The shift towards remote work for millions of U.S. employees can have significant tax implications for businesses.
There is potential long-term impact as employers rethink the need for expensive spaces and shift to partial or fully-remote workforces.
Potential tax implications include payroll tax, corporate income and franchise tax, as well as taxes imposed based on employee headcounts.
Panelists discussed what employers need to consider on the recent New York State Bar Association Continuing Legal Education webinar, “The Tax Trials and Tribulations of a Remote Work Environment.”
Jennifer White, of Reed Smith, said that “for years, the discussion around a remote workplace was viewed pretty negatively by the Tax Department and HR Department because it was so complicated.” She explained that it created nexus issues and withholding tax questions that for the most part companies chose not to take on.
Now, White says, the power is in the employees and the workforce. “I think it’s going to be a reality of the future.”
“Those issues that percolated in the background and didn’t get much attention because of cost-benefit analyses didn’t require companies to look at them have certainly shifted now,” said White. “Companies have no choice but to focus on these issues or else will fall subject to significant audit risk and exposure.”
States generally require employers to withhold tax based on where an employee performs services (may be the employee’s “residence” state), according to Alysse McLoughlin, of McDermott Will & Emery.
States may also require withholding if an employee travels for work purposes to another state.
What is an employer’s obligation to determine the employee’s location or residence? Can the employer rely on information provided by the employee?
Most of the time they can, unless they have knowledge or reason to believe it’s wrong, said McLoughlin.
Convenience of the Employer
White said that some states have reciprocity agreements, which can help protect employers. The most common example is Pennsylvania and New Jersey. She added that not all 50 states do, and it’s not always logical choices that apply.
New York has the most recognized “convenience of the employer test.”
When non-resident telecommuters are assigned to a New York office but perform their services out of state for their convenience rather than the employer’s necessity, New York will require the employers to withhold income tax on all of these employees’ wages. Employers can establish the taxpayer’s home office as a bone fide employer office and count days worked at that office as non-New York days, but New York imposes a strict factor-based test to these arrangements.
Even if the state of residence does allow a credit for the other state taxes, an incremental tax increase may occur when the resident state rate is lower than the state in which the employee’s work office is based. Whether a new or existing employee was for an in-office or a remote job, or is in commutable distance or not is irrelevant. Connecticut, Delaware and Pennsylvania also apply the convenience rules.
Convenience of the employer rules can result in double tax for a telecommuter when the employee’s state of residence does not provide any credit paid to the state of the employee’s work office for services performed while working from home.
There is a compelling argument that convenience of the employer tests should not apply during shutdowns due to working from home being mandatory and/or at the employer’s necessity rather than for the employee’s convenience. However, recent New York guidance suggests that the Tax Department disagrees.
A few states have issued guidance indicating that they will not change withholding locations if employees are working remotely in the state solely because of the COVID-19 pandemic.
McLoughlin added that as employers begin to consider “work from anywhere” arrangements, consideration will need to be given to implementing procedures to obtain knowledge of personnel work locations in order to ensure proper withholding.