Although the COVID-19 public health emergency in the United States officially ended on May 11, there are some things that aren’t likely to go away anytime soon. There is no doubt that the pandemic has permanently changed how we work, learn, and recruit talent. In addition, the pandemic ushered in a new way to work — remotely — and, by all accounts, hybrid/remote work is here to stay.
According to the careers site Zippia, 26% of U.S. jobs are remote, 16% of U.S. companies are fully remote, and flexible work arrangements are offered by 80% of U.S. companies. Employers are steadily reducing their real estate footprints, and employees argue that working remotely increases their productivity and reduces commuting, food, and childcare expenses.
What Are Tax Homes and What Do They Mean for Withholding?
While employers are adapting to this new way of work, guidance on how to treat the taxation of employees working remotely has been slow to catch up. Simply put, remote work has changed the facts and circumstances in which employees determine their “tax home.” The U.S. Internal Revenue Service (IRS) Tax Topic #511 (Business Travel Expenses) suggests that the tax home is the “the entire city or general area where your main place of business or work is located, regardless of where you maintain your family home.”
For most employees who are simply working from home in the same city as their employer’s workplace, there “tax home” has not changed. However, there are remote employees whose tax homes have legitimately met IRS requirements to the extent that they may be reimbursed by their employers for business travel expenses when traveling between their tax homes and other job-related locations.
From a state income tax withholding perspective, employers are constantly trying to keep up with the rules to remain compliant. With the reality that remote employees could be residents of one state but working in another, the burden for employers to withhold state tax in one or more of the 41 states that impose individual state income tax withholding can be terribly challenging, especially if your employer has no idea where remote employees are working.
How Does Income-Tax Withholding Differ from State to State?
The problem is that there is no standard system that states use to determine when employers are to begin withholding state income tax. In general, states have adopted a “Source Income” doctrine, which requires withholding in the state in which the employee is performing services. To make withholding requirements even more interesting, some states require withholding on wages that an employee earns for performing services for just one day, and other states may impose tax on nonresidents after certain thresholds, such as 14 days, or on nonresidents who earn certain wage or income-amount thresholds (e.g., $1,500).
In addition, there are 15 U.S. states and the District of Columbia that have reciprocity agreements for withholding. That is, even though you are performing services in a state in which you are working (i.e., your “work state”), withholding will only be required in the state for which you are a resident.
To simplify the various state withholding rules, legislation such as the Mobile Workforce State Income Tax Simplification Act of 2021 has been introduced to establish a uniform threshold of 30 days during a calendar year before states can impose withholding rules on nonresidents.
Although the act has bipartisan support in the U.S. Senate, it has repeatedly failed to pass in the U.S. House of Representatives. Suffice it to say that the more than 20 states with no withholding thresholds aren’t ecstatic with the proposed 30-day threshold requirement, as they stand to lose 30 days of withholding (when compared with current withholding requirements).
What Can Employers Do About State Income Tax Withholding?
Due to the complication of state income tax withholding, and to accommodate a remote work environment, it is recommended that employers create an automated “Remote Work” request form that is routed from the employee to the employee’s manager, then to the legal, accounting/tax, HR, and payroll teams.
This approval process provides an opportunity for the employer (e.g., legal, accounting/tax, and payroll) to identify the location in which an employee would like to remotely work, and then determine whether they are registered to do business in the location before the employee actually begins providing services in the desired location.
The Key for Remote Work and Taxation to Co-Exist
When employees work in locations in which their employer has not registered to do business, the physical presence of employees is likely to create nexus for their employers. It can subject the employer to unemployment taxes and withholding rules that they haven’t applied because, in many cases, the employers have no idea that their employees are performing services in locations for which they did not previously have a business connection (nexus).
Once states are aware that a nexus situation is present, other state-related taxes may be imposed on the employer. This includes Corporate State Tax, Sales and Use Tax, Property Tax, and Tangible Personal Property Tax, to name a few.
The key for remote work and taxation to co-exist is communication and remote work readiness. Before offering remote work as a benefit and recruitment tool, employers would be well advised to understand their compliance obligations associated with remote work and to create policies and supporting infrastructure to ensure a successful employer-employee experience.
There’s a lot more to discuss on this topic. Register for the UKG HR and Payroll eSymposium on June 7 to join Dr. Martin Armstrong’s session, “Compliance Complexities,” and learn more about how to navigate this complex issue.
