States such as Texas and Florida that have no individual income taxes could become havens for remote workers.
In recent months, many states have issued guidance to address employee income tax withholding for employees working remotely because of the pandemic. Some states have more rigid rules that may require calculations based on the number of days an employee works within a state.
The pandemic expedited remote working as a necessity which has forced business owners to grapple with several questions, including employee efficiency, effectiveness, and the cultural impacts that remote working has on a company or firm. We can now add another concern to this growing list of questions that directly impacts chief financial officers — state and local taxes.
Generally, employers are required to withhold income taxes in the state where the employee performs services. So, office-based employees are subject to tax withholding for the state in which the office is located.
Many states across the country are enacting new legislation aiming at businesses that have employees working remotely in states where they do not have a physical location. CFOs need to be mindful of these legislative maneuvers because they could present significant tax liabilities. Here are some specific steps CFOs should be taking now if they have employees working remotely in states other than the company’s home state.
1. Find Out Where Remote Employees Are
As with any business challenge, the first step should always be to find the root of the problem. CFOs, working in conjunction with human resources, should immediately audit where all of their employees are physically located. Most remote workers have set up their offices at home. Is their home located in the same state as the company’s business office? Have any employees decided to work from another location, such as a vacation home? Getting a handle on employees’ locations will make the process of discovering potential tax liabilities much easier.
2. Monitor Guidance from State Departments of Taxation
In recent months, many states have issued guidance to address employee income tax withholding for employees working remotely because of the pandemic. Some states have more rigid rules that may require calculations based on the number of days an employee works within a state.
For example, New York recently issued guidance that for nonresidents whose primary company office is located in New York, days spent telecommuting during the pandemic are considered “worked in the state” for purposes of computing whether the employee has spent enough days to be considered for taxation in their home state. New York also has a “convenience of the employer” rule whereby a nonresident employee is subject to New York income tax when the employee works from home for their own convenience, rather than at the employer’s convenience.
3. Understand Reciprocity Agreements and Income Tax Rules
For some employees and employers, remote working may have a very positive impact. If an employee decides to work remotely in a state with a lower tax rate than the office state, this could be good news for the business. States such as Texas and Florida that have no individual income taxes could become havens for remote workers. CFOs should also have a firm grasp on reciprocity agreements between states.
With COVID-19, several states have issued guidance providing for the temporary suspension of nexus thresholds.
For example, Virginia, Maryland, and the District of Columbia have an established reciprocity agreement that only requires income taxes to be withheld by the employee’s home state. These agreements were established when an employee lived in one state but commuted into another state for work. While not created for remote working, the agreements may also apply in remote working situations.
4. Research Business Tax Nexus Thresholds
Traditionally, for business tax purposes, a business was deemed to be doing business in a state for applicable income or franchise or sales and use tax purposes if it had an employee that worked in a specific state. As remote working has grown in popularity over the years, most states have similarly stayed with the same policies. For CFOs, this had led to additional tracking, record-keeping, and return-filing responsibilities. With COVID-19, several states have issued guidance providing for the temporary suspension of nexus thresholds where the pandemic has forced employees to work remotely in a state where the business would otherwise not have nexus. Again, CFOs will need to be mindful of more permanent working conditions going forward.
5. Audit Insurance Coverage
A key consideration for remote workers is insurance coverage, including health, workers’ compensation, and even directors and officers insurance. Insurance coverage is often precise. Limitations may exist in various situations where the policy was not designed for or did not anticipate remote workers. CFOs should carefully review policies that are in effect. Although some may give consideration for “temporary” situations, they may not cover permanent remote work.
Now that COVID-19 vaccines are here and becoming increasingly available to the adult population in the United States, it is unclear whether companies will return to normal, pre-pandemic office working arrangements. Until business leaders make those decisions, CFOs must remain diligent in protecting their companies from state and local tax liabilities that could impact their bottom lines. That is especially true for those businesses that decide that remote working is no longer a “temporary” thing.
Gary Wallace, CPA, is the managing partner of Richmond, Virginia-based Keiter. He has more than 30 years of federal, state, and local tax experience. Before joining Keiter, he served as the CFO of Richmond, Virginia-based CCA Industries.