By Chuck Oliva, CPA, MST, Manager
Remote and hybrid working has become the new norm since the pandemic. Data shows many Americans want the option to either work remotely or have a hybrid version where they alternate between working from home and at the office. A recent U.S. Census data report showed that as of 2021, there were roughly 27.6 million Americans who worked remotely. Since many businesses employ remote workers, it is important to know the compliance issues associated with these employees. There is a wide range of reporting requirements for businesses having remote workers which depend upon such factors as:
- Where these employees perform their job functions;
- What duties these employees perform;
- The activities the employer has in the city or state where remote employees are working; and
- What company property (computers, printers, cars, etc.) is used by the remote employee.
Although every state is different, some key areas of importance and potential tax liability exposure include payroll or withholding taxes, income taxes, sales taxes, and local taxes.
PAYROLL/WITHHOLDING TAXES
Generally speaking, the state where an employee principally performs services for his employer will have primary taxation authority over the individual’s salary and wage income. Their state of primary residence also has taxation authority over the individual’s overall taxable income, which includes wages as well as investment and other income. To avoid double taxation, the resident states allow a credit for taxes paid to other states (such as where the employee works).
However, the employer must withhold state income taxes based on where employees perform their services. For some employers, it is very straightforward:
- If the employee works at the employer’s location, the employer generally must withhold that state’s income taxes.
- If an employee is working fully remotely in their home office in another state, the employer generally must withhold that other state’s income taxes.
It gets more complicated in situations where employees travel and work in multiple locations during the year. For these traveling employees, employers must consider which jurisdiction(s) these employees work in and the applicable state income tax withholding rules in those jurisdiction(s).
- Some states have “day-count” thresholds that determine when withholding becomes applicable. When an employee works or is expected to work over that threshold within that state, the employer is required to register and must begin withholding income tax on that fraction of the employee’s wages. For example, New York uses a 14-day threshold. If an employee is expected to be working in New York for more than 14 days in the year, the employer must withhold NY income tax on that fraction of their wages.
- A few states have “convenience of the employer” rules which require the employer to discern whether the employee is working from another location:
– For the convenience of the employer—such as when the employee is sent to visit a customer or a conference; or
– For the convenience of the employee—such as when an employee is working remotely from their out-of-state home for their convenience.
– In the latter case, the income is taxed in the employer’s state, and NOT where the services are performed. - Lastly, some states have reciprocity with some neighboring states such that a resident of one state who works in the other state is only taxed on wages in their resident state. Illinois, for example, has reciprocity with Iowa, Kentucky, Michigan, and Wisconsin. Illinois does NOT have reciprocity with Indiana.
BUSINESS INCOME TAXES
Businesses file state income tax returns dependent upon the activities they have in each state—where they are “doing business.” However, state definitions for “doing business” can vary greatly among the states. Your employees’ job functions in a state can be a critical factor in determining whether you are “doing business” in that state for income tax purposes.
Federal statute determines that if an employee’s activities in a state are limited to merely soliciting sales of tangible products in a state, then that state cannot impose any income taxes on that business.
However, employees whose activities in a state extend beyond the “mere solicitation of sales” such as those who provide services to customers, or perform managerial activities, can cause the employer to be “doing business” in that state, which would require the business to file and pay income taxes in that state.
SALES TAXES
Generally, physical presence will require sales tax collection. The mere presence of an employee—even an employee working remotely from home—in a state can create the obligation of a business to register for and collect applicable sales taxes on sales shipped to that state.
CONCLUSION
Allowing employees to work remotely requires thoughtful consideration of additional tax compliance exposure and requirements. Not only could the remote employee cause new payroll, income, and sales tax obligations, but the company must consider local taxes, too. Similar to the state level, local taxes can include city payroll tax withholding, business privilege/gross receipts taxes, property taxes, income, and franchise taxes. As the popularity of remote work arrangements continues to increase, so does the responsibility to remain compliant with increasingly complex state and local filing requirements. Businesses should weigh the benefits to be received against the additional compliance burdens that could be imposed by simply allowing an employee to work remotely from home.
If you have any questions about the reporting requirements of your business or if you would like additional information, please contact your MichaelSilver tax advisors at 847.982.0333. We’re here to help.
Chuck Oliva, CPA, MST, Manager, is a state and local specialist that works with mid-size to large enterprises focusing on multi-state income flow-through taxation and sales and use tax within a variety of industries, including financial services, manufacturing and distribution, professional services, real estate, tech service companies, and retail. He has provided accounting and tax services for over twenty years. His experience includes compliance, sales and use tax consulting, and income tax planning and consulting.