Overcoming Tax Policy Issues for Remote Workers
Working from home has been the reality for millions of Americans for months due to the COVID-19 pandemic, but it also creates new tax challenges for employers. Many staff members reside in one state but work for a company in another. In her first article for AccountingWEB, Nahla Davies addresses how business owners can work around these kinds of tax issues.
Many employees previously working physically in one state now find themselves working remotely from another, as COVID-19 continues to increase the pace at which the nation's workforce fulfills their many different jobs from home. And, in the wake of such large-scale mobilization of so many employees in different industries, states in the U.S. are in the middle of revisiting their remote-work policies that regulate their tax revenue and how they’re affecting an increasingly prominent work from home reality.
But why, exactly, is a steadily growing remote workforce affecting states' tax revenue, anyway? The answer lies behind companies' nexus tax obligations, which states have traditionally imposed on businesses and their employees who continue to physically operate within that state’s boundaries. Now that COVID-19 is indisputably transforming the way that many of us get our work done, it's becoming less clear just how big of an impact on employers' nexus obligations remote employees are creating.
Let's take a look at the way state rules for employees apply to a burgeoning remote workforce and how these issues are affecting accounting and tax professionals who are struggling to keep up with changing tax policy dialogues that affect how businesses report their state taxes.
Flexible Payroll Reporting
As new discussions about how to effectively tax a workforce that’s scattered across the county and is increasingly virtualized continue to emerge, it's become more important than ever to decide how tax policies should affect the future of remote work and the employees who will take part in it.
In the meantime, though, certain employees who, for instance, travel to one state and work remotely from another all in the same week need their company to provide a payroll system that can identify how much total time that employee spends in both states on a weekly basis. Otherwise, these staff members risk triggering tax liabilities for their employers by submitting inaccurate expense reporting and travel booking records when they report taxes at the end of the year.
To avoid this headache, consider using double-entry accounting solutions that can accurately report revenue items and all of the related expenses your employees may incur when working in multiple states. With these solutions, your employees can invite accountants to review their expenses and ensure everybody is accurately reporting their year-end state tax obligations. These accounting solutions also make it simple to correctly calculate profits and losses across multiple states so you can avoid unwanted tax liabilities because of your new remote work reality.
By this point, it should go without saying that, in order to best protect the physical, mental and emotional well-being of your employees during the current pandemic, you need to enforce social distancing policies that mandate they work remotely to prioritize their safety. The catch, however, is that these social distancing policies make it much more difficult for businesses' accounting professionals to accurately report their clients’ expenses and provide them with effective financial counsel.
Compound this reality with the fact that accounting and tax professionals have a much harder time getting a hold of important documents during peak tax filing season when everybody is now working remotely, and it can suddenly seem impossible to properly keep track of everything that you need to report to the state at the end of the year.
Businesses that have gone mostly or completely remote can respond to this situation with Software-as-a-Service (SaaS) or on-premises solutions that can integrate with a more cloud-based environment. Mobilizing your remote workforce and the way they report their taxes becomes much easier with SaaS-based solutions that allow your employees working across different states to access and store tax information that your accounting and tax professionals can subsequently and easily manage.
Furthermore, over 80 percent of all organizations expected to be fully reliant on SaaS for the bulk of their software needs by 2022, so switching over to this system now will help ensure that you are future-ready. This cloud-based solution becomes doubly important during tax season, when it's absolutely vital for your accountants to have immediate and complete access to your employees' tax documents for a proper review.
Tax Structures that Create Value
Companies can adopt certain tax structures that create high value in terms of their net after-tax proceeds. These tax structures can be hugely important for businesses that now have remote employees in multiple states and are worried about potential exposure to paying taxes in those states. Well, there’s good news: They may be able to claim a certain amount of that business's net income through taxation.
Think about it: Suppose you're a business that, all of a sudden, has just a few employees who are now working remotely in a state you previously weren’t operating in. Given the recent upheaval of traditional nexus tax obligations and the way that states mete them out, these new remote employees can unintentionally incur unexpected state taxations that gobble up a large share of your net income.
Fortunately, many business owners may now find themselves in a position to reap positive outcomes from a beneficial tax structure that can offset unexpected state tax obligations.
You can divvy up your business's tangible assets (real estate, equipment and inventory, just to name a few) as well as its intangible assets (goodwill or company trade names, for example) to positively affect the capital gains or ordinary income tax that it will need to legally pay on an annual basis. Make sure to solicit expert consultation from a financial advisor to help you figure out which tax structure makes the most sense for your business as it continues to spread its workforce out remotely and across different states.
A mobilizing, virtualizing workforce seems to be a trend that's here to stay for the foreseeable future. And although there are many states in the U.S. that are willing to cooperate with businesses and their employees to meet their state-required tax obligations at the end of each year, it's important for companies to adopt measures that mitigate how much they're paying back toward states' tax revenue funds. And don’t forget: States are now starting to revisit their tax policies in light of an increasingly remote workforce, the lack of aid from the federal government, and the astronomical costs of COVID-19.
One thing is certain: States will need to continue to rely on the revenue they obtain from taxation, especially as the COVID-19 pandemic offers no end in sight. To that end, it's vital that businesses adopt measures to mitigate state-level taxes they pay in (potentially) multiple states. Make sure that your business, as well as its accounting and tax professionals, is ready for state tax authorities to begin scrutinizing annual income in the hopes of replenishing their tax base in new and innovative ways.
Nahla Davies is a software developer and tech writer. Before devoting her work full time to technical writing, she managed, among other intriguing things, to serve as a lead programmer at an Inc. 5,000 experiential branding organization whose clients include Samsung, Time Warner, Netflix, and Sony.