HR Administration

Tax compliance a key consideration for remote work policies

By Elizabeth Karcher, Simon Davies

Feb. 20, 2020

There was a time when a sick child or inclement weather meant staying home and actually not working. 

The prevalence of full-time remote work arrangements is on the rise. Companies are competing fiercely for top talent and looking for ways to differentiate themselves from competitors. tax compliance

One way to do this is through flexible work policies. Moreover, by allowing employees to work remotely, companies can cast a wider net for talent that is not restricted by the geographic boundaries of their offices. 

For companies that decide that it is a business imperative to offer flexibility, it is also important that they find a way to do so that is compliant. One compliance challenge for companies and employees is how, when, and where to withhold state taxes for their employees. When addressed proactively, this challenge can be managed in a way that is simple for the company and painless for the employee. 

Let’s follow the example of an employee who has worked for a company for 10 years in Atlanta but needs to move to Columbia, South Carolina, indefinitely to help a sick family member. The employee’s company doesn’t have an office in South Carolina but agrees to let her work from home. They ask if she can spend a few days each month in Atlanta to stay connected to her team and she agrees. 

States will primarily assess tax on income earned within that state; this can include employees who have an office in that state, employees who work from a home located in that state, or even employees who travel into a state for business trips. This means that the employee will owe tax in South Carolina where she is living and working, and also in Georgia where she is traveling for work. 

Since remote workers are typically subject to taxation in the state where they are physically working, employers need to understand not just who their employees are and where their main office is, but also where they are actually working day by day. The place they are working is generally where the company will need to withhold taxes. 

This is generally true except for some states with unique rules (for example, New York). A key step for the employer is to make sure their payroll system considers that she is working remotely, which may also require the company to register for payroll in her new state.  

Such employees who pay tax in multiple states can generally reduce taxes paid to their home state by the amount paid to other states (unless you live in one of the nine states that doesn’t tax employment income at all). Even though this particular employee will pay taxes to Georgia because of her business trips there, she can reduce the total tax she pays to South Carolina so that she isn’t double taxed.

There are also reciprocal agreements between certain states; think of these as a negotiation between two states where both say, “We won’t tax your people, if you don’t tax ours.”

These agreements generally occur between neighboring states, such as Ohio and Indiana. An Ohio resident who travels into Indiana every day for work will not owe tax to Indiana. Unfortunately for our Georgia employee, South Carolina and Georgia do not have a reciprocal agreement.

The challenging part for her employer will be identifying how much time she is spending in Georgia and determining what portion of her wages are related to Georgia workdays and should be taxed in Georgia. If she has a set schedule (such as one week in Georgia/three weeks in South Carolina) they can program this allocation into her payroll. If her travel is more sporadic, the company will need to find other ways to monitor where and when she is working. 

Her employer can achieve this by leveraging expense data and travel booking records to keep track of where she, and the rest of their employees, are triggering a tax liability. This challenge may increase if she responds to the flexibility offered by her employer and instead decides to work remotely from a friend’s home in Virginia for the week.

So how will this employee actually avoid double taxation in South Carolina? Her employer will reduce some of the South Carolina taxes withheld from her paycheck and withhold Georgia taxes instead. 

Her employer will issue her Form W-2 at the end of the year and report a portion of her wages to Georgia and a portion to South Carolina. Finally, the employee will file her tax returns in both states and claim a credit in South Carolina.  

Keeping all of this in mind, is the challenge of the payroll reporting and multiple state tax filings a worthwhile option for employers? Do the benefits of flexible work arrangements outweigh the administrative complexities? Potentially. But proactive, automated solutions are key. 

Companies that address this issue proactively can put policies in place that articulate upfront how employees will be impacted by remote work arrangements. They can also automate much of the tracking and monitoring of employee travel for payroll reporting requirements. Many companies accomplish these activities without requiring additional HR or payroll headcount, resulting in a positive outcome for both the employer and the employee who can benefit from flexibility. 

Elizabeth Karcher is the senior manager, Global Employer Services, for Deloitte Tax LLP.

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