Playbook for 2022: How to avoid tax landmines with remote work plans
This Week's Quote:
"In every day, there are 1,440 minutes. That means we have 1,440 daily opportunities to make a positive impact.
-Les Brown, Author
We all complain about the crazy and sometimes foolish behavior of the Internal Revenue Service. But, other taxing entities such as states, school districts and municipalities can be just as bad. These other taxing entities have no qualms in spending $100 to collect $10 in extra taxes. They are also quick to charge interest and penalties on anything and everything. The sheer volume of notices they often generate can be overwhelming. At least for now, things aren’t going to get any better with all taxing entities hard-pressed for additional funds. The below article by Ty West further explains the dilemma that many of us are in.
-Mark Bradstreet
“More states are ending their safe harbor provisions for remote workers, which could create obstacles for businesses.
Many companies are embracing permanent remote work to attract and retain employees during an intense hiring environment.
But, if employers aren’t careful, experts say they could open themselves up to costly tax headaches in 2022 as they attempt to comply with a complex patchwork of local, state and, potentially, international tax laws that often weren't designed with remote work in mind.
“Taxes are something you really need to look at in order to understand what to do when somebody is requesting remote work,” Lorraine Cohen, a San Francisco-based partner in accounting firm Deloitte’s global employer services practices, previously told The Playbook.
In many cases, the tax pitfalls come when an employee of a company chooses to relocate to an area where the company didn’t previously have a physical location.
Michael L. Raff, director of the tax department at Northfield, Illinois-based Gordon Law Group Ltd., said those moves can have implications for income, sales and payroll taxes, depending on the local or state rules involved.
“Work from home is going to bring additional logistical challenges that companies need to be prepared for and make sure that’s part of their work-from-home decision-making process,” Raff said. “It shouldn’t be something that’s taken lightly.”
Raff said companies need to be aware of the consequences of a workforce that spans state lines.
A local company that previously had all its workers in one place could be treading into a complicated situation if workers scatter to numerous locations under a permanent work-from-home scenario.
Raff said most states have rules that once a company eclipses a threshold of payroll, property or sales within a state, they are then considered to have a “nexus” in that state for income tax or sales tax purposes.
Having a physical presence in a state is typically a trigger to generate a sales tax nexus.
“Just by having one employee over state lines where you previously didn’t can bring about significant changes to your tax liabilities,” he said. “That’s one of the biggest concerns I have.”
Payroll taxes are a significant potential pain point, and they have been further complicated by the events of the past 15 months.
Raff said many businesses are discovering employees may have moved far away from their offices since the start of the pandemic — sometimes without informing the employer.
“Because of that, you might unknowingly be subject to being out of compliance with payroll tax withholding (rules),” he said.
Raff said some companies have amended employment taxes from 2020 because of issues related to employees working from home in a new city.
Even within a single metro area, the high number of jurisdictions and their varying rules have the potential to create headaches.
When lockdowns went into effect in 2020 and many employers shifted to remote work, a number of states enacted safe-harbor tax provisions for remote workers and their employers.
The safe harbors ensured an individual temporarily working from home in a state that was different from where their office is located wouldn't be subject to that state’s personal income tax. It also meant their employers wouldn't be required to withhold and remit payroll taxes to that state and register to do business and start filing various other taxes simply because of the presence of a remote worker.
When they were first implemented, the safe harbors were seen as temporary measures to ease burdens on businesses and workers during the Covid-19 pandemic. But over the past 18 months, many employers have embraced remote work — sometimes on a permanent basis.
Experts have told The Business Journals that companies planning to implement a work-from-anywhere policy need to strategize about the tax impact and consult with their professional advisers to avoid a tax surprise that could result from a remote workers creating a new tax nexus in a state or jurisdiction.
Those strategies will soon become more important because many states are phasing out temporary safe harbors for remote employees.
Bruce Ely, partner and founding chair of the state and local tax practice team at law firm Bradley Arant Boult Cummings LLP, said several states have withdrawn or announced plans to soon withdraw their safe-harbor protections, which could leave both remote workers and their employers at risk.
“Not only do employers need to know where their employees are physically working from these days, or plan to work, they also must monitor the status of various ‘safe harbor’ notices or rulings that many states have issued during the Covid pandemic,” Ely said.
Pennsylvania, for example, ended its temporary safe harbor June 30. Indiana ended its, too, unless the worker has a doctor's order, according to the CPA Journal.
The changes come as more employers, such as Big Four accounting firm PwC and a number of tech companies, have announced plans to embrace remote work on a permanent basis.
For a major firm like PwC that already has physical offices in dozens of states, the end of safe-harbor provisions might not be a huge change.
But for small businesses that have traditionally been located in only one state, the changes could potentially lead to bigger tax bills and new administrative burdens, especially when they find themselves navigating rules that vary from state to state.
Attorneys and accountants have told The Business Journals there are several best practices companies and employees can follow to avoid the tax headaches as they evolve their remote-work policies.
Ely said it’s a good idea for workers to pre-clear moves to other states with their employer and be prepared to potentially be told “no.”
“That one employee’s presence might trigger an expensive filing and tax obligation,” he said.
Experts say companies can develop a preapproved list of designations where workers could move, such as a list of places where the company already has a physical presence and employees.
Employers should also have a protocol in place to assess and make decisions on acceptable locations for remote work.
“If it turns into a free-for-all, and you have a traveling employee, you’re never going to be able to keep up with all of the requirements associated with withholding,” Raff said.
Raff said the troubling part for employers is monitoring so many different local rules and ordinances — including those that conflict with one another, such as the battle between New Hampshire and Massachusetts over taxes for remote workers that ended with the Supreme Court siding with Massachusetts in its bid to tax workers who were working from home in New Hampshire for Massachusetts companies.
Credit Given to: Ty West, Editor-in-Chief, The Playbook, January 5, 2022
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This Week’s Author, Mark Bradstreet
-until next week.