Although the work from home era may have been considered temporary at the beginning of the pandemic, some people are now questioning whether they need to return to working in the office at all.
If employees begin making their temporary work from home arrangements permanent, employers must address new tax implications for their businesses and their employees. Here is a brief overview of some work from home state tax, international tax, and withholding tax concerns facing employers.
Entity Income/Franchise Taxation
Where you file tax returns and owe tax depends on your activities and presence in each state. To determine if you have new filings because of the shift to remote work, you should consider two questions: Have your attorneys registered you to do business in these new states and have your employees moved to states where you did not previously have a filing obligation?
Apportionment and Jurisdiction Issues
States can only tax income apportioned to their state. The shift of employees to new work states may change the division of income among the states, particularly for service businesses. These apportionment shifts could increase or decrease your overall state tax liabilities. Also, some states permit the imposition of city income and sales taxes. Have your employees moved to new cities or towns? If so, you may need to register and pay taxes to new localities.
Credits and Incentives
The availability of statutory credits and negotiated state incentives often depends on the maintenance of a certain level of employment in a state. Have you continued to maintain the required levels? Has your employee movement made your business eligible for new credits and incentives?
Permanent Establishment
The movement of employees into or outside the U.S. could create tax liabilities in the U.S. for foreign businesses and their employees as well as foreign tax liabilities for U.S. businesses. In addition, the movement could create changes in how these companies charge related entities for goods and services that cross borders.
Employer Income Tax Withholding
The movement of employees might also require withholding changes. State rules differ on the treatment of remote work, particularly for employees with traditional offices available to them.
Individual Residency Issues
Employees moving to remote work have learned that distance from the office is no longer a factor in choosing their home state. These employees may face individual income tax residency determinations and should document their moves to support their conclusions.
State Unemployment Insurance
Employers generally must determine the state of localization (essentially the permanent office location) in order for each employee to make state unemployment contributions. As employees begin to make permanent moves with lifestyle changes, employers need a process to identify those employees that have permanently shifted their work locations out of the office. This permanent shift to a remote site may lead to localization in the new state and required state unemployment contributions to that state.
Additional Questions to Consider
If you have questions about the taxation of employees working from home, please reach out to a member of your DGC client service team or Scott Thomas, JD, LLM at 781-937-5172 / sthomas@dgccpa.com. You can also visit DGC's coronavirus web page at dgccpa.com/coronavirus which is frequently updated with new resources to help you deal with the financial impact of the coronavirus on you and your business.
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