After the past year of remote work, some companies are looking to enshrine this in their policies for good. If you’re considering this, it may pay to understand the nuances of state tax code—as many are looking to collect on remote work and others might become tax havens (and recruiting hotspots).
Five Steps to Identifying State Income Tax Risk for Remote Workers
Whether your home office is looking to make it more complicated or you’re wondering if you could improve cash flow by hiring from Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming, a recent CFO article looked at some of the challenges that might come about in 2021—and the steps you take to prepare.
1) Know Your Landscape
The first step to addressing the challenges of remote work taxation will be to figure out where your employees are working. Though many have simply worked from home, others may have taken this as an opportunity to take a workcation. Did an employee decide to set up shop in the Wyoming wilderness or spend their winter in Florida? Did they move somewhere that could provide unforeseen tax liability? These are questions you’re going to want to answer.
2) Pay Attention to Your State
High-tax states have started to see the effects of the pandemic and are looking to recover lost money. With Manhattan spending much of 2020 as a ghost town and New York City seeing record out-migration, legislators are looking to collect. CFO notes that New York, for example, issued guidance stating that for companies headquartered in the state, days spent telecommuting during the pandemic are considered “worked in the state.”
Going forward, when remote work isn’t a necessity, this state also happens to have 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.
Watch your local state government for this kind of change.
3) Get to Know Reciprocity Agreements
Though New York may be making things tough, many businesses may have an opportunity to eliminate withholdings and free up a bit of cash flow. According to CFO, 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.
Better yet, some states have reciprocity agreements in place that only require an employer to withhold employee income taxes for the employee’s home state. While not created for remote working, the agreements may also apply in remote working situations.
4) Beware Economic Nexus Considerations
Though remote work might help you on the income tax front, it might add headaches for sales tax. Remote workers might create an economic nexus in the state they work, requiring your business to file sales tax in the new state. Though 2020 might have been avoided thanks to suspension of nexus rules, this could create an issue moving forward.
For more information on nexus, check out our two-part blog on the different ways states guide economic nexus.
- How Different States Approach Sales Tax Collection (Part 1)
- How Different States Approach Sales Tax Collection (Part 2)
5) Look into Insurance Coverage
The final challenge for employers will pertain to the health and workers’ compensation insurance coverage that exists. CFO notes that,
“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.”
Returning to Normal: Discuss Your Plans with Controllers Council Members
From establishing a hybrid work landscape to planning for a return of revenue, your path back to normal might prove challenging. No matter how long it takes, the return to work has to happen at some point. If you’re looking to plan for a safe and consistent plan for getting back to normal, stay up with all the latest from the Controllers Council, and sign up for updates, as we expect to announce a return to normal webcast in the coming weeks.
Looking to learn even more? Sign up for our email list and be among the first to hear about our upcoming event on the road back to normal.
Additional Tax Resources