Telework, Taxes and Your Business
Working from home was already building momentum before “social distancing” became a household buzzword. Now, some studies predict that 50% of employees from one-third of companies may continue working from home long after the pandemic ends. Many businesses are beginning to hire employees who already reside in other states, which comes with drawbacks and perks. Employers have more options than ever before when recruiting new talent. Yet welcoming more remote workers aboard doesn’t just mean more employees are now working in dress shirts and sweatpants. If only it could be that simple . It has implications for your taxes as well –– especially if some of your employees have relocated to other states either temporarily or permanently. Here are some factors to consider when navigating this uncharted territory.
How will telework impact federal and state income taxes?
Federal income tax withholding procedures remain the same, no matter where the employer and employee are located. However, for state income taxes, most states rule that the tax is due where the work itself was performed. Say your company is located in North Carolina, but your employee lives and works in Oregon. You should withhold tax in Oregon, but there are exceptions to the rule. For example, six states have passed what’s called a “convenience of the employer” rule: Connecticut, New York, Delaware, Nebraska, Pennsylvania and Arkansas. Under this law, an employee’s income will be taxed in the employer’s location –– regardless of where the employee is performing the work. Read our article about filing taxes when working remotely to learn more.
Will more states adopt a “convenience of the employer” rule?
The jury is still out. Some states have opted to keep an employee’s income taxes going to the state where the companies are physically located. In contrast, a few other states are continuing to apply the physical-presence rule and tax remote employees in the states where they are working. This could lead to some double-tax issues down the road, where two states will be competing for employees’ taxes due to conflicting laws. Federal relief from an additional COVID-19 package may help address these issues, but nothing is set in stone just yet.
How will telework impact unemployment taxes?
Typically, employers pay federal unemployment (FUTA) taxes, and paying state unemployment (SUTA) taxes is equally cut and dry. Employers simply pay the tax where the employee would file for unemployment benefits. But what happens if employees work for a company that’s located in one state but live in a different state (or multiple different states)? There are four tests used to determine which state the SUTA tax should go to: localization of service, base of operations, direction and control, and residence. Be sure to look into each state’s individual laws regarding SUTA taxes.
What other factors should be considered with telework?
Data Security
In addition to the income tax challenges telework poses, companies must also remain vigilant about data security and privacy issues. More remote employees means more cyber-attack vulnerabilities, thanks to the uptick in employees working on wireless networks (public or private) and their own mobile devices. Prevent your company’s data from being compromised by ensuring your security policies and procedures are clear and thorough.
Workers’ Compensation
Another issue employers should consider is workers’ compensation. What happens if an employee is injured while working from home? Set clear guidelines around work hours and job roles and responsibilities for telework employees to make it easier to differentiate if a claim is truly work-related or not. Make sure your insurance is updated with the locations where your employees are performing the work as well.
Are your employees still working from home? Have you hired remote employees in other states? What issues have you run into? What questions do you have about income or unemployment taxes? One of our experts at Core Group would love to help you maneuver through this complicated new landscape. As always, reach out with any questions you may have.