Even as organizations implement return-to-office policies, employers and payroll professionals still need to be aware of the complexities related to remote work compliance. The tides may be shifting, but for many organizations, remote workers still make up a portion of their workforce.
Employers with U.S. domestic remote workers must consider many tax compliance complexities. These include navigating tax laws related to withholding taxes, payroll taxes, and reporting requirements in the areas where remote employees reside. As a result, remote work compliance is increasingly important.
6 Factors to Consider for Remote Work Compliance
- Take stock: Employers should always be aware of where their employers are working. Do you really know if they’re physically working in their house? Do you really know what state that house is in? Getting clarity on these questions should be your first priority.
- Research each state: When withholding taxes, research a states’ definitions of residents and nonresidents. For nonresidents, the work state almost always requires withholding unless a day or dollar threshold or reciprocity agreement applies. Arizona, Connecticut, Delaware, Illinois, Kansas, Missouri, Nebraska, and New York have nonresident allocation forms, which allow an employee to attest to how much time they spend in the state and allow the employer to rely on the attestation.
- Know convenience-of-the-employer rules: This rule says employees who work for a company in one state but do their work remotely in another state are subject to the payroll tax in the state where their employer’s office is located. There are convenience-of-the-employer rules in seven states: Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania.
- Evaluate courtesy withholding: Employers choosing to do courtesy withholding—withholding tax for employees who live in states where the employer is not registered to do business—must register as a business in those states. This can be a deterrent for choosing courtesy withholding, however, it’s a convenient benefit for employees.
- Follow the latest state tax court decisions related to remote work: For example, a Florida resident working partially remotely for an Alabama employer was considered to have Alabama-taxable income and had to have Alabama state tax withheld (reference the decision here). In Alabama, the court upheld an income tax assessment on an employee who moved to Idaho to work remotely for an employer in Alabama. The court found that the employee no longer had an Alabama domicile but that his income was still Alabama-sourced because he was considered to “transact business in Alabama” through his remote employment (reference the decision here). The takeaway: People don’t know how to pay income taxes when they’ve already lived and worked in the same state, and they don’t alert their employer that they’ve moved. Employers can be audited if an employee moves states, does not notify their employer, and then becomes unemployed and claims unemployment benefits. Workers’ compensation agencies can also audit based on unemployment tax returns.
- Examine the details:
- Reporting can be tricky. New Jersey Temporary Disability Insurance (TDI) benefits should be reported as third-party sick pay in Box 13 of Form W-2, Wage and Tax Statement because a portion of the benefits are subject to federal tax.
- For stock options and 401(k) plans, it’s important how they tell plan administrators about employees’ work state changes and whether they tax 401(k) distributions were earned or where the employee lives in retirement.
- Income from bonuses and stock options, especially bonuses based on prior years of service, might need to be allocated to different states based on where the employee lives.
- For wage and hour, some large retailers have received lawsuits for violating New York’s requirement that “manual workers,” interpreted to include any employee that spends more than 25% of their time doing manual labor, must be paid weekly.
States are continuing to consider adding employee benefits and looking at remote work and business registration. Everything is a trend to follow. If one state’s doing it, other states are looking at it. As employers, it’s important to be aware.