How Remote Work Complicates Taxes
Employees and employers alike must reckon with the tax implications of remote work policies.
By Jeff Stimpson |
Much has been written about the rise of remote work over the past year. When COVID-19 struck, organizations sent their employees home with laptops and varying degrees of preparedness. While employers that did not have work-from-home policies and infrastructures in place may have been at a disadvantage initially, it seems many organizations have warmed to the idea: A 2021 survey from Buffer found that 45 percent of employees continue to work from home a year after the pandemic’s first wave and about the same number say their company plans to make remote work a permanent policy.
Now that remote work is here to stay, it’s likely that employees will take advantage of their newfound freedom of movement and employers will take advantage of the larger candidate pool that comes with a greater geographic range. But once employers and employees find themselves in different states, a new question emerges: How does working remotely impact taxes for both organizations and their team members?
Working From Where?
As employees and employers seek to understand how their tax obligations might shift when they’re in different states, the answers require a detailed look at the tax laws of each state. The first step for employers is knowing where their employees are.
“The migration of workers from the workplace to working from home, then from a primary home to a secondary home, has made keeping up with tax obligations difficult,” notes Jessica L. Macklin, senior manager for tax at Wipfli LLP in Lincolnshire, Ill.
Employers will need to create a process to gather and maintain records on where employees are actually working, perhaps with a quick survey or by simply asking their employees to keep them in the loop. “A few of my clients have started a list of states in which they have approved people to move or work based on their current tax obligations and the minimal impact hiring people in those states would have on their filings,” Macklin says.
Shawn Kane, partner and leader of the state and local tax services group at Crowe LLP in Oakbrook Terrace, Ill., says that some of his clients are exploring the use of software on company laptops or handheld devices to track the physical location of employees, but notes that this tactic can trigger privacy concerns. However they choose to do it, employers have to start by getting a clear picture of exactly where their employees are—then dive into what that means.
Define Your Terms
“Generally, a state sees an employee who works in their state as having taxable compensation in their state—although there are exceptions, including reciprocal agreements and the length of time the worker spends in the state,” says Angie Vaughn, a manager in the accounting services group of Sikich in Peoria, Ill.
Illinois has reciprocal agreements with Iowa, Kentucky, Michigan, and Wisconsin that can simplify tax processes if employers and employees find themselves split between any of those states. Under these agreements, if an Illinois resident works in any of those states, tax on their compensation is paid to Illinois. The same goes for a resident of Iowa, Kentucky, Michigan, or Wisconsin who comes to work in Illinois—their payroll taxes go to their state of residence.
But outside of the agreement, things get more complicated. Factors like how each state defines “residency” come into play. For example, Illinois defines a “resident” as someone who was domiciled in the state for the entire year. Meanwhile, Wisconsin defines a “resident” as a person who maintains his or her domicile in Wisconsin, whether or not that person is physically present in Wisconsin or not. In other states, where someone lives can be determined by other factors such as where they vote, register their vehicle, or own or rent property.
But a worker doesn’t have to be a technical resident of a state to be taxed—each state has a different threshold. For example, Illinois law states that nonresidents must pay taxes to Illinois if they work in the state for more than 30 days.
“In a number of states, a nonresident employee is subject to withholding on the first day of travel into the states. Other states have a threshold like Illinois—New York’s is 14 days, for example,” Kane says. “Many states also provide an exemption for nonresidents performing services in a state during a declared disaster, such as the pandemic.”
Whether a state or city can continue to tax wages of a nonresident employee if the employee no longer is present in the state continues to be litigated in various courts, including in Massachusetts and New Hampshire, where legal wrangling over taxing remote workers recently involved the Supreme Court and the U.S. solicitor general. This new tax world will continue to evolve as governmental bodies and regulators try to figure out who they can and can’t tax, wherever those taxpayers happen to be.
Companies’ work-anywhere policies—not new but popularized by the pandemic—can present sticky tax issues. “It’s not just about payroll taxes,” explains Eric Fader, managing director for BDO in Chicago. “Businesses may also be subject to new tax filings, including state income or franchise taxes and sales and use taxes. They may also need to answer non-tax questions, such as whether the business is required to qualify with the secretary of state in the secondary location.”
The tax issues that arise from a dispersed workforce shine a spotlight on nexus, the connection between a taxing state and a business. Some states have offered nexus relief in light of the pandemic and consequent remote work boom, but that varies by location, with some states limiting relief to corporate income and franchise tax. Then there are states like Kentucky, which considers nexus relief on a case-by-case basis. Much like the growth of online commerce forced a legal reckoning on sales tax, the boom in remote work may very well force a reexamination of payroll taxes and more at the federal level.
Alabama, the District of Columbia, Georgia, Illinois, Indiana, Iowa, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania, Rhode Island, and South Carolina have all provided explicit guidance for the nexus challenges arising from a remote workforce. Employers should certainly read the guidance, but they may still need the specialized expertise of a CPA licensed in the relevant state to understand all the implications of state and local tax law.
The Employee's View
Employees will have to consider most of the above questions, but their tax issues are likely to be a little simpler as they’ll probably have only two states’ laws to navigate. However, those laws can extend beyond having to simply file tax returns in multiple states to include higher withholding for county, school district, state disability taxes, and more.
Employees should also clearly communicate both their current locations and how long their planned stays might be to their employers. Though this may seem intrusive, it helps ensure that both parties can do as much as possible to meet their tax obligations.
“Communicate with HR,” Macklin says. “Make sure your employer knows if your location changes from temporary to permanent. Some states have offered relief from their typical withholding rules for individuals located on a temporary basis in the state but that same relief doesn’t extend to individuals who have taken a temporary situation and made it permanent.”
States’ residency audits so far largely target taxpayers who have actually moved to lower-tax states and telecommute, but there’s reason to wonder if more states will try this tactic against all remote workers as COVID-19 continues to hammer tax coffers.
According to moveBuddha.com, a national moving company, Illinois has seen a 6.1 percent rise in the number of residents leaving the state from March to September of 2020. Already financially strapped and saddled with a relatively large out-of-state commuter population, Illinois could very well change or more harshly enforce their tax structures as more companies announce fully remote work policies.
As it is, states are clarifying their tax positions on remote work during the pandemic slowly and piecemeal—California and Massachusetts recently became two of the latest to issue or update guidance on unemployment insurance and other employment taxes—but legislation at the federal level would help create uniformity with the various states, Kane says.
“This kind of legislation has been introduced frequently in past years, with the most recent being the Mobile Workforce State Income Tax Simplification Act. While that proposal did not get enough support, the pandemic has highlighted this issue for employers and employees,” he says. “Perhaps in the future a similar bill will make its way into law.”
Jeff Stimpson is a writer based in New York. He has covered tax concerns for more than 20 years for various industry publications, including Accounting Today and Financial Advisor.