Many employers have been managing remote workers successfully since the start of the pandemic. Some have found that employees working remotely are so much happier, more engaged, and more productive that the company wants to continue the arrangement. Unfortunately, depending on the locations of the employees and workplace, both employer and employee might wind up owing extra taxes. MP’s HR and payroll experts share what employers need to know if they’re managing a team working from home.
Managing remote workers and multi-state taxation
During the pandemic, many employers were supervising remote employees who lived in different states than where they worked. This circumstance was generally not a problem because states made temporary agreements that would simplify taxation. A byproduct of this circumstance was that employees who worked in different states than where they lived were also either
- Paying income tax towards states they were not physically working in, or
- Not paying towards the roads, communities, and facilities of the states where they were actually working
Now that the pandemic and remote work trends have been ongoing for over a year, states are ending these temporary tax agreements. These decisions may have serious repercussions for both individual employees and companies.
Even with a single employee in another state, a company might be subject to tax obligations there. Individual employees may also be subject to unexpected tax burdens. They may also have to file two or three different tax returns as state agreements and the pandemic slowly draw to a close. Some remote workers and lawmakers are also taking action, fighting and even suing states and cities for the right not to pay income tax on states and cities they don’t physically work in. Other lawmakers are concerned that making changes around the way remote employees are taxed could pose a serious detriment to the big cities where companies build their headquarters. Many states had worked out reciprocity agreements pre-pandemic (like New Jersey and Pennsylvania or Massachusetts and New Hampshire), but are now redrawing them. Some states, like Massachusetts and New Hampshire, are even contentiously disagreeing over these past and future reciprocity agreements. In short, the issue is complicated and MP’s HR services experts suggest that companies start preparing for this issue now.
What employers who are managing remote workers in other states must do
Employers can begin to prepare a plan for this issue by creating a system to track where employees are working from. This preparation will help them assess their state tax filing profile and provision preparation. Organizations that want to allow their employees to continue working at least partially remote may want to work with their accountants on tax modelling. They should develop the best operating models, employee polices, and systems to assist them in meeting their goals for compliance and risk. These are six steps that employers can take to make more comprehensive plans for their post-pandemic workforce.
6 Steps to Prepare for or Avoid Remote Work Taxation Challenges
- Create a process for tracking employees who work remotely, including time and expense reporting. MP’s payroll software can assist with this task.
- Assess state tax risk, especially with data about where employees are currently working remotely from. Define an ideal risk tolerance.
- As organizations create their plans to return to work or allow remote work, they should take taxes and tax risk into account.
- Employers might consider using services and technologies like MP’s to streamline and increase operational efficiency.
- As more employees now have the capability of working from home, make sure to monitor how much work is being done remotely, especially with any non-exempt workers.
- Reconsider intercompany transactions through the lens of a transfer pricing perspective to explore other sourcing of receipt analyses and thus mitigating nexus risk.
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