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Remote work remains a growing focus of employers with employees increasingly seeking jobs that permit remote or hybrid work arrangements. Though the flexibility and benefits of remote work for employees is highly desired, it comes with some additional considerations and potential tax complications for the employer.
State Income Tax Withholding Considerations
State income tax requirements, as a general matter, are governed by the state laws where the employee works. This means that the states that collect income tax from residents (all states except Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) will generally impose withholding obligations on employers who pay wages subject to tax within that state, including wages to remote workers. Employers with remote workers may not be set up for payroll withholding and taxes in states where employees are working. In some cases, employers may not even know what states their remote employees are working in.
However, it is increasingly important for employers to ensure that their payroll practices are updated to reflect remote or hybrid work arrangements. It may be difficult for employers to determine the proper states for withholding and income tax, particularly for employees with hybrid work arrangements where more than one state is involved. Most states follow the “source taxation” rule, requiring withholding based on where an employee earns the taxable wages. Accordingly, employees who work from home would be taxed in their home state for time spent working at home. But if the employee works in an office in a neighboring state on certain days of the week, the employee may also have a tax obligation in that state and the employer may need to allocate wages to both states for withholding purposes.
To make it even more challenging, some states require withholdings based on residency or the “convenience of the employer” rule, which states that if a remote work arrangement is for the employer’s convenience, then state income taxes will be withheld in the state of the employee’s assigned office location rather than their remote worksite. Currently, six states – New York, Delaware, Connecticut, Nebraska, Oregon, and Pennsylvania – as well as some major cities have adopted some form of the convenience of the employer test. Employers may also be obligated to withhold state taxes for non-residents who travel to various states throughout the year. This requirement may be based on the amount of time spent in the state or on the amount of money earned while working in the state.
Unemployment Tax Withholding Considerations
In addition to payroll taxes, employers must consider where to pay unemployment taxes. Fortunately, the unemployment tax situs rules are more uniform. Generally, all states follow “localization of work” rules to determine where employee wages must be reported and therefore where unemployment insurance taxes must be paid. For remote workers, an employee is “localized” in the state in which they are physically present, unless that work is incidental to work in another state. While determining localization of an employee’s work can be highly fact specific, the general rule of thumb is that an employee’s remote work is localized to where they live and therefore unemployment insurance taxes must be paid in that state.
Corporate Tax Considerations
Beyond ensuring compliance with state income and unemployment withholdings, the presence of remote workers in states where the employer is not located may create additional corporate tax obligations. The types of corporate tax liability that may be implicated include corporate income taxes, sales and use taxes, business personal property taxes, and local taxes and fees on businesses. Allowing employees to work remotely and move freely throughout the country (or even internationally) can create a slew of unforeseen tax liabilities and reporting requirements that the company must be prepared to address.
Action Items for Employers
Remote work arrangements are certainly a benefit to both employees and the employer in many cases. But prior to entering into such arrangements, employers should consider the various employment law requirements of each state where employees are located, registration requirements, and other implications of having employees in a particular jurisdiction. The tax issues as discussed in this article are just one aspect of remote work compliance. The following steps are recommended for employers with remote workers:
- Conduct a survey of employees to determine the locations where they work.
- Develop a remote work policy and, if necessary, individual agreements to require notice of any change in work location by a remote employee.
- Consider whether there are business or compliance reasons for limiting the jurisdictions in which remote work is allowed.
- Review payroll and state law compliance issues for the states with remote workers.
- Ensure handbooks and employment agreements comply with the applicable state laws for the states in which there are remote workers.
This information has been prepared for UBA by Fisher & Phillips LLP. It is general information and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.
