Jeff Dorris, CPA | Mauldin & Jenkins, LLC
As COVID-19 eases in the U.S., Americans are venturing back out to restaurants, retail shops and favorite recreation spots. During the workday some are returning to the office, but not everyone. A growing number of workers want to continue working remotely, at least part of the time, and many employers are accommodating this preference. Happy workers make for happy employers, but some businesses may face a less-than-joyous realization that moving to an increasingly remote workforce often comes with significant tax consequences.
One of the first questions employers should ask when they allow employees to telework is how the decision impacts the company’s income tax nexus in the states where workers reside. Changes to the organization’s geographic footprint may establish nexus in (multiple!) new states through the physical presence standard, sometimes with only one or a handful of employees working from home in a particular state.
Several states suspended their nexus rules for teleworkers during the pandemic, but only on a temporary basis. In addition, “convenience of the employer” exceptions may come into play when the employee is choosing to work from home, which may alter the nexus picture in states with these policies. Nexus thresholds vary by state and change frequently, so employers must constantly monitor the evolving rules or be prepared for costly surprises.
Ensuring appropriate withholding of payroll taxes should be another prime concern for businesses with remote workers. Like business income tax nexus, state-level payroll taxes may depend on the state in which employees perform their work – not where they live. Some states made temporary allowances for workers displaced from their usual locations during the pandemic, but these policies vary from state to state.
Once the emergency status is rescinded we assume that most states will revert to their normal rules, meaning employers that still have remote workers may need to carefully scrutinize and possibly alter their payroll tax withholding processes. There’s also the potential situation where two different states both claim the right to tax employee wages. This unfortunate arrangement is a realistic possibility and one that’s expensive for employer and employee alike.
Calculating the appropriate business tax apportionment factor is yet another challenge for businesses that now have more remote workers. Does the company’s apportionment factor change based on additional in-state employees if workers live in a state with a three-factor apportionment protocol (property, payroll, and sales)? In this case, the state could reasonably claim that both payroll and sales apportionment factors required recalculation. Here again, some states have offered allowances to accommodate pandemic-related workforce changes, but only temporarily and not in all states with this type of apportionment structure.
Businesses located near a state line are particularly prone to the perilous situations of nexus in multiple states, double taxation, and other problems stemming from the trend to telework. A large number of employees at these organizations may commute across borders, creating a new concern about nexus (for sales tax as well as income tax), withholding, and apportionment when they move to a permanent remote situation.
But even centrally positioned companies that are far from neighboring states should be aware of the potential for these types of issues. Tens of thousands of Americans relocated while working remotely and are now continuing to do their jobs at favorite vacation spots, with family in far-flung locales and from myriad other locations. Some employers may not even know where their employees are from day to day, which poses a risk not just in terms of taxes but could also violate rules surrounding data security and privacy.
Guidance remains sparse so far and states are rapidly revising their taxation policies in response to the sudden shifts in workforce distribution, making it extremely challenging for businesses to make informed decisions regarding telework. Company leaders should proceed with caution, striving to meet the needs of their employees and crafting policies that attract and retain top talent, while staying alert to the potential for significant tax issues that stem from the rise in fully or partially work-from-home teams.
Contact your Mauldin & Jenkins advisor for customized advice and smart strategies to help your business successfully navigate this treacherous transition.