What Employees and Employers Need to Know

More than two years into the global pandemic, one thing is clear — the remote workforce is here to stay. As more companies find themselves having employees residing across the U.S., the question around where and how to file taxes is coming up more often.

As CEOs and business leaders are learning, navigating the tax landscape is more nuanced than ever, and the laws are changing. If you have team members located in multiple states and are wondering what to do next, you are not alone.

Here are some common tax considerations to help you prepare for this filing season and to consider for future business expansions.

Know where your employees are working

When it comes to managing payroll taxes for remote workers, employers need to be apprised in real time where those employees are actually working. In general, a company’s employees will be subject to personal income tax in the state where the employee is working. There are a number of reporting requirements, and each state has a different threshold for when an employee’s income will be subject to personal income tax. While some states stipulate that an employee working for a single day in the state will owe personal income taxes on wages earned for that day, other states give more of a safe harbor, such as 14 days.

Likewise, states may have different thresholds for when an employer needs to withhold income taxes on wages paid to an employee working in another state. These thresholds may be the same as the triggering of personal income tax liability, or they may have a longer period of time. For instance, an employee working remotely for only a few days may owe personal income tax on the wages earned in that state, but the employer may have no withholding obligation because the employee is not in the remote state long enough to trigger a withholding requirement.

Additional tax filings for employers

In addition to personal income taxation and withholding, the presence of a remote worker in an unknown state can trigger income tax reporting issues and additional tax liability for the employing company. Generally, having an employee working in a state will trigger an income tax filing requirement for the company since the employee creates a “physical presence” for the employer in that state.

For example, a Tennessee-based company that has a remote employee working in Kentucky would generally be obligated to file a Kentucky corporate income tax return; however, if the employee has not let the employer know where they are living and working, the employer may not know they now have nexus in Kentucky and are subject to Kentucky’s corporate income tax.

Understand state-specific laws

When it comes to states’ approaches to how income is taxed and residency is determined, each state has its own set of rules. This can be complex for employers who have employees scattered across the nation. Generally, there are considerations regarding how many days the employee spends in a state.

For most states, individuals who spend any portion of 183 days in the state are considered residents. They would also be considered domiciled in that state, which means they have permanent place of abode and typically call home. Domicile can also be determined by school enrollment, voter registration and other factors. In some scenarios, more than one state can consider someone a full-time resident if their specific parameters apply.

Pay attention to special circumstances

In an interesting twist, one example of how taxation can be different from state to state involves the state of New York. When the pandemic started, New York decided that even if a non-resident of the state of New York who used to travel into the state for work each day (thus being taxed in New York full-time) stopped coming to the state and did their work from home outside the state, the income would still be taxed by the state of New York – even though none of the work was actually happening in New York.

The state determined anybody who worked remotely from a New York-based job for their own convenience was still required to pay tax on their full wages as if they still worked in New York every day. The only way around that rule was to set up a bona fide office in another location, which comes with its own set of rules and expenses.

This “convenience of the employer” doctrine has been adopted in a handful of other state, e.g., Connecticut, Delaware, Pennsylvania, etc., but has not found widespread acceptance presumably because of the complexities and inequities that it can render.

Have a plan

For employers, it is key to have a plan to accommodate remote employees and be on top of all these issues. While the pandemic will recede, this new reality of having remote employees is here to stay.

If your company needs help navigating taxes, LBMC can help.

Jay Hancock is a shareholder in LBMC’s State and Local Tax Division. He can be reached at jay.hancock@lbmc.com. Blake Harrison is a shareholder in LBMC’s Wealth Advisors Division. He can be reached at blake.harrison@lbmc.com.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.
Original post on Nashville Business Journal