The numbers are in: A staggering
Not quite. Pre-pandemic state tax regulations are back in full effect, and remote work has muddied the waters when it comes to compliance. From complying with individual state withholding guidelines to ensuring adherence to all labor and employment laws, there are a whole host of
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Tax considerations in a post-COVID world
During the height of the COVID-19 pandemic, many states passed temporary provisions exempting employers from certain nexus rules, such that the presence of remote employees in the state would not in itself cause the employer to have a taxable presence in the state. Those provisions worked well for a time, but as we have emerged from the pandemic, many of those temporary exemptions have since expired. Employers who have workers in states in which they do not otherwise operate need to be sure they're compliant with all tax withholding rules for each state in which they have employees. State-specific labor and employment laws, such as paid leave laws, also need to be considered.
It is also critical that both employer and employee understand where the employee's income will be taxed. Usually, this is the location where the employee performs the work. However, certain states — including Connecticut, Delaware, Nebraska, New Jersey, New York, and Pennsylvania — use the "convenience of the employer" rule. In those states, employees are taxed in the state in which the employer is located, meaning that if an employer is located in Pennsylvania but the employee lives in Virginia, each state may attempt to tax the same income.
In general, there are exceptions that will be applicable to ultimately avoid double taxation, but ensuring employees understand that they may need to deal with this situation will ward off surprises and upset come tax time.
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HR and Finance departments also have questions about tax credits or incentives for employers with remote workers. While there were some programs relating to the pandemic, those have largely expired. There are still a few cities and states with programs paying workers to move to their area, and sometimes those programs encompass people moving while pursuing remote work, but those benefits are generally limited to the employee, not the employer. To the extent state tax credit programs exist for employers, such programs are typically aimed at incentivizing companies to establish a physical presence in a particular state or city. For example, cities and states may grant tax incentives to companies who open offices in their area and bring in full-time, on-site jobs — incentives that don't really benefit organizations with primarily remote workforces.
Having employees work across international borders introduces an additional level of complexity. Employers need to ensure they understand local laws, but should also be aware of any treaty benefits the country may have that could impact tax obligations for both employer and employee. Each situation should be evaluated on a case-by-case basis; but when in doubt, consult an attorney specializing in international labor and tax law.
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Employee communication
These tax implications can be confusing for employees, and many may not even be aware that they exist. For this reason, setting out written guidelines as part of either an employee handbook or a separate remote work policy is typically the best practice, as this ensures all information is clear, concise, and centralized. Be sure the policy includes information on the positions eligible for remote work, how remote work is approved, standards regarding the terms of remote work, and in which states it may be performed. It's also a good idea to set forth a protocol for employees to request approval to relocate, and put employees on notice that moving states without the employer's permission could lead to termination (if applicable).
I'd also recommend having regular annual reminders for current employees — both to ensure they're compliant with the law and to keep them updated on any new regulations or tax breaks they should be aware of. These communications should include information about the implications of moving locations or working in multiple states throughout the year, the stipulation that they may have to file more than one tax return, and the fact that choosing to relocate may alter their taxes. While an annual email may suffice, it can be helpful to host a Q&A informational session with the HR and accounting departments.
While there's no denying that remote work continues to remain an attractive option for employees and employers alike, there are tax-related concerns worth considering. Consulting with your counsel and accountant to remain abreast of current laws and regulations will help head off the negative consequences of inadvertently becoming non-compliant, and ensuring that HR communicates well with employees about their remote work options can avoid unpleasant surprises and maintain goodwill.
