Tax Implications of Remote Work – What Employers Need to Know

Employers of remote workers must understand the tax repercussions, which include sales tax nexus as well as state income taxes and sourcing rules.

Some states utilize the “convenience of employer” rule, which designates an employee’s tax home as the company office location.

State Taxes

Remote work arrangements that span state lines often present complex tax implications for both employers and employees, particularly as regards withholding obligations, workers compensation coverage and unemployment insurance premiums, state registration requirements, financial statement reporting responsibilities and compliance with employment laws.

Employing commuter employees who travel across state lines is a potentially tricky situation, depending on their circumstances, they may establish nexus in two states and be subject to income taxes in both. Some states have reciprocal arrangements for sales taxes that help streamline matters by only requiring one state to collect and remit sales tax payments; these may only apply during COVID-19; they may not remain permanent agreements. Some states impose the “convenience of the employer” rule which requires individuals traveling for business purposes to file non-resident state returns even though they reside elsewhere. Therefore, creating a uniform policy across remote workers and remaining open with employees regarding their location of work can help minimize tax issues and unexpected surprises.

Federal Taxes

Remote workers face unique federal taxes beyond state income tax rules, including sourcing wages based on residence and taxing certain benefits.

Many states have reciprocal agreements in place to facilitate income-tax collection for employees working remotely across multiple states, but this doesn’t negate the need to conduct additional research.

At a federal level, physical presence of a company and/or its personnel creates sufficient contacts to establish a taxable presence (nexus). Depending on its activities and involvement in foreign countries, depending upon these activities it may also be considered having established permanent establishment there and required to pay corporate taxes there.

Employers of remote workers must fully comprehend how remote work impacts state and local taxes to minimize unintended consequences and ensure compliance with applicable laws, as well as identify opportunities for savings or deductions.

International Taxes

As COVID-19 has altered the work landscape, many organizations have implemented or expanded remote work policies. Furthermore, international remote work presents unique income tax challenges for employees moving between locations if each country has different regulations regarding income tax payments.

Determining an employee’s tax residency can be complex and it’s vital that it’s done accurately. A person is usually considered a resident of a country when they spend 183 or more days within any year there with their primary home, economic interests and personal ties being located there.

People working in multiple jurisdictions may be subject to double taxation unless there is an agreement in place between these countries to prevent this. A knowledgeable tax professional can help identify which tax regime applies and manage this risk, including setting up procedures to assess withholding tax risks on a regular basis and implementing tax credits, treaties or reciprocal agreements where needed.

Other Tax Implications

Flexibility provided by remote work is invaluable, but employers must also understand its associated tax implications. Companies employing workers from various states and countries should make sure they remain compliant with state and local tax codes and rules, in order to remain compliant.

Some states have implemented special rules during the coronavirus pandemic to determine whether an employee is working remotely by necessity or convenience; these rules also determine whether an employee should be considered resident in that state, which has significant tax ramifications.

State tax laws and differences among them can often cause confusion for organizations, making compliance challenging. It’s essential that they be aware of these variances, consulting a tax professional to make sure their obligations are being fulfilled accurately – this includes state income, payroll, sales, property and other taxes as well as unemployment insurance taxes and employer withholding liabilities when calculating remote work tax liabilities.