[US] The impact of a permanent remote workforce on taxes

In the wake of the COVID-19 pandemic, the majority of US businesses have introduced or expanded their work-from-home policies and companies have had to adjust to remain operational. As organisations take the time to evaluate the impact of this transformation of their business models, it is important to bear in mind that many changes - including the remote working trend - bring tax consequences. The CPA Journal breaks down the key points to remember.

With the US workforce continuing to disperse, states will take a closer look at the impact to their bottom lines. Some jurisdictions could change employee nexus rules; as both a way to continue to collect payroll taxes on those who work in a different state from their business’ physical location but also as a financial recovery mechanism for the post-COVID world.

Payroll tax issues

The fight over payroll taxes has already begun in many states. New Hampshire is facing off with New York and Massachusetts over residents who previously commuted to Boston and New York City for work but are now working from home in New Hampshire.

In March, Massachusetts established a rule that would tax out-of-state workers who used to commute to the state and extended that rule until the end of the year. New Hampshire contends that the rule is punishing residents who have chosen not to travel to Boston for work.

New York has also decided to continue taxing workers who have left the state to work remotely. Any change in that plan could prove very costly for the state which collects nearly a fifth of its tax revenue from commuters.

According to The CPA Journal, these conflicts are potentially the first of what will be many to erupt between states reluctant to lose payroll and income tax revenue. The general rule is that state income tax withholding is currently required for the state in which an employee provides services, not in the employee’s state of residence. Exceptions exist for reciprocal agreement states, as well as five states (Connecticut, Delaware, Nebraska, New York, and Pennsylvania) with a “convenience of the employer” rule that predates COVID-19.

Currently, most states have agreed on policies promoting administrative ease; as long as the employee’s current remote work location is temporary due to COVID-19, withholding requirements will not be imposed. However, this is likely to change as states grapple with budget deficits, even though states like New York have declared that its temporary remote work rule would remain in force only as long as the governor’s emergency declaration is in place. 

Although many states’ initial emergency declarations have expired, new ones are likely to be issued. Regardless of existing, expired, or new state emergency declarations, many employers are opting to keep their doors shut until mid-2021.

Even if a payroll tax nexus were created and modelled specifically for the new remote work lifestyle, there will still be questions for businesses to ask in order to to stay compliant: 

* What happens when an employer mandates its employees work from home under the “convenience of the employer” rule, as some states have today? 
* What happens when an employer opens its door but an employee, for various reasons, including health and safety, continues to work remotely? 
* When does a requirement to work remotely turn to voluntarily and when does temporarily become permanent?
* How do these shifts impact the legacy payroll tax nexus rules?

Discussions about new nexus standards are happening in states across the country. There are too many unknowns for businesses to fully prepare, but they need to understand the environment they operate in, what drives policy shifts, and how they might be impacted. Even more crucial is the fact that once an employer has payroll tax nexus, it also has business nexus for other taxes in the state. 

Currently, an office location dictates payroll and business taxes, as opposed to an employee’s home state. Under new nexus rules, however, the home state of each employee could drive payroll and other tax nexuses.

CFOs and accountants can gain some insight and model potential scenarios by applying the framework they would use if they were planning to open a new office in a new state; taking sales and use, payroll, income, and other business taxes into account. Most importantly, business and finance leaders should provide critical information to lawmakers at the state level regarding business needs, challenges and opportunities.

Though much remains unknown, one thing is certain; businesses will need to keep up to date on and comply with evolving tax requirements as their workforce and operating models shift.

Source: The CPA Journal

In the wake of the COVID-19 pandemic, the majority of US businesses have introduced or expanded their work-from-home policies and companies have had to adjust to remain operational. As organisations take the time to evaluate the impact of this transformation of their business models, it is important to bear in mind that many changes - including the remote working trend - bring tax consequences. The CPA Journal breaks down the key points to remember.

With the US workforce continuing to disperse, states will take a closer look at the impact to their bottom lines. Some jurisdictions could change employee nexus rules; as both a way to continue to collect payroll taxes on those who work in a different state from their business’ physical location but also as a financial recovery mechanism for the post-COVID world.

Payroll tax issues

The fight over payroll taxes has already begun in many states. New Hampshire is facing off with New York and Massachusetts over residents who previously commuted to Boston and New York City for work but are now working from home in New Hampshire.

In March, Massachusetts established a rule that would tax out-of-state workers who used to commute to the state and extended that rule until the end of the year. New Hampshire contends that the rule is punishing residents who have chosen not to travel to Boston for work.

New York has also decided to continue taxing workers who have left the state to work remotely. Any change in that plan could prove very costly for the state which collects nearly a fifth of its tax revenue from commuters.

According to The CPA Journal, these conflicts are potentially the first of what will be many to erupt between states reluctant to lose payroll and income tax revenue. The general rule is that state income tax withholding is currently required for the state in which an employee provides services, not in the employee’s state of residence. Exceptions exist for reciprocal agreement states, as well as five states (Connecticut, Delaware, Nebraska, New York, and Pennsylvania) with a “convenience of the employer” rule that predates COVID-19.

Currently, most states have agreed on policies promoting administrative ease; as long as the employee’s current remote work location is temporary due to COVID-19, withholding requirements will not be imposed. However, this is likely to change as states grapple with budget deficits, even though states like New York have declared that its temporary remote work rule would remain in force only as long as the governor’s emergency declaration is in place. 

Although many states’ initial emergency declarations have expired, new ones are likely to be issued. Regardless of existing, expired, or new state emergency declarations, many employers are opting to keep their doors shut until mid-2021.

Even if a payroll tax nexus were created and modelled specifically for the new remote work lifestyle, there will still be questions for businesses to ask in order to to stay compliant: 

* What happens when an employer mandates its employees work from home under the “convenience of the employer” rule, as some states have today? 
* What happens when an employer opens its door but an employee, for various reasons, including health and safety, continues to work remotely? 
* When does a requirement to work remotely turn to voluntarily and when does temporarily become permanent?
* How do these shifts impact the legacy payroll tax nexus rules?

Discussions about new nexus standards are happening in states across the country. There are too many unknowns for businesses to fully prepare, but they need to understand the environment they operate in, what drives policy shifts, and how they might be impacted. Even more crucial is the fact that once an employer has payroll tax nexus, it also has business nexus for other taxes in the state. 

Currently, an office location dictates payroll and business taxes, as opposed to an employee’s home state. Under new nexus rules, however, the home state of each employee could drive payroll and other tax nexuses.

CFOs and accountants can gain some insight and model potential scenarios by applying the framework they would use if they were planning to open a new office in a new state; taking sales and use, payroll, income, and other business taxes into account. Most importantly, business and finance leaders should provide critical information to lawmakers at the state level regarding business needs, challenges and opportunities.

Though much remains unknown, one thing is certain; businesses will need to keep up to date on and comply with evolving tax requirements as their workforce and operating models shift.

Source: The CPA Journal