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Tax Implications for Employers with Remote Workers

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With more and more companies hiring remote workers who will stay remote beyond the COVID-19 pandemic, accountants should understand the tax implications of remote work for business-owning clients and their employees. Here, Barry Sunshine, CPA, CGMA, a senior tax partner with Janover LLC, offers advice for navigating these emerging tax rules. 

Feb 11th 2022
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The shift to remote work due to the COVID-19 pandemic has given employers and employees increased flexibility in when, where and how work is performed. Because many companies have now implemented permanent remote-work policies, accountants should be aware of the tax implications of such a work structure for both employers and their remote employees, which can present both challenges and benefits. 

What Changed Due to COVID-19

Under normal circumstances, having a physical presence in a state establishes nexus — a connection that creates a tax obligation — with that state. When businesses first started to allow employees to work remotely due to stay-at-home orders in the spring of 2020, many states indicated they would not seek to impose nexus on the basis of employees temporarily working remotely due to COVID-19, according to “The State of Nexus Laws for Remote Employees” by Gail Cole published in August 2020. However, some states were outliers, such as New York, which said temporary remote employees would still be liable for New York income tax. 

Several states, including New York, have the “convenience of the employer” rule. This rule says if an employer requires an employee to work out of state of residency, withholding is taken only in the state where the employee is based out of.  However, if the employee chooses to work out of state (rather than being required to do so),  he may be subject to tax in both states (the employer’s location and the employee’s location). States’ interpretations of the law are always changing to adapt to how workers are working, according to Barry Sunshine, CPA, CGMA, a senior tax partner with Janover LLC.

Pros and Cons for Employers

Typically, if all of a companies’ employees are based in and working out of the state in which the company operates, the company will only file taxes in that state, assuming it does not have nexus outside the state. However, if a company has employees who are working remotely in a different state, the company may have nexus outside its home state, thus requiring the company to file in those states in which it has remote employees, Sunshine said.

The convenience of the employer rule will determine how much nonresident remote employees will be taxed on their income. For example, a company that is based in a state that has the rule, like New York, with an employee working remotely from Florida, which does not have the rule, is required to withhold New York state income tax from all wages paid to the employee. However, these rules vary depending on the state.

Many companies are now actively hiring remote employees, some of whom live and work outside of the state where the company has its office. These companies must be diligent in keeping track of where their employees perform their services.

 “Some companies are finding that they now employ 10 remote employees working from 10 different states. These companies need to review where these employees are performing services to see whether they should be filing state returns in those states,” Sunshine said.

 The convenience of the employer rule applies only to employees, so companies may get a break depending on where their remote employees work, Sunshine said. For example, an employer based in a high tax-rate state, such as California or New York, that has employees working remotely from states with lower income tax rates might end up paying less in taxes if most of its employees work from those states. 

What Remote Employees Should Know

In states where the convenience of the employer rule does not apply, employees who work remotely from that state for a company located in another state may get a tax break.

 “If [the employees’] home state tax rate is lower than the rate where the office is based, there are tax savings, as long as the convenience of the employer rule doesn’t apply,” Sunshine said. 

Additionally, an employee who works remotely from a state where the convenience of the employer rule does not apply, such as Florida, for a company based in a state where the convenience of the employer rule does apply, such as New York, should find out whether the employer has a legitimate office in the employee’s home state. If so, the employee may be able to eschew the convenience of the employer rule. In any case, an employee performing services for a company in another state should find out whether the convenience of the employee rule is applicable to their situation.

 What Accountants Should Know

Accountants need to communicate these rules to their clients early enough that their clients can fully comply with the rules and track the locations of employees proactively, rather than waiting until after the end of the year, Sunshine said. Accountants who are involved in tax compliance should not make assumptions about their clients this year, he added.

“Clients put a lot of trust and faith in accountants to make sure they are complying with the tax laws. Accountants should be aware of these rules and look at their clients differently this year since a lot of employees are now working remotely,” Sunshine said. 

Remember, too, that each state has its own tax laws and wants to attract as much revenue as possible, Sunshine said, so interpretations of these laws vary.

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