The way we work and where we work has been transformed. Many businesses are adopting flexible work arrangements to address talent shortages, reduce costs, optimize real estate, and support expansion. Attracting and retaining the best talent today sometimes means agreeing to non-traditional remote working arrangements. However, businesses and employees alike should be aware that new tax responsibilities will also accompany work location freedom. Since remote and hybrid work is here to stay, businesses must take action to address both the opportunities and challenges that come with supporting a mobile workforce.
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At the beginning of the COVID-19 pandemic, many states relaxed their state and local tax return rules for remote workers. Now that those tax compliance grace periods have ended, businesses continuing to support a hybrid or remote workforce need to better understand tax obligations including wage and hour issues, apportionment, employment taxes, and other employment law implications. In this article, we will examine these issues, share best practices to develop sustainable hybrid work strategies, and provide tips to ensure you stay in compliance.
Be Aware of Payroll Tax Compliance Risks
Remote and hybrid work has its benefits; but there are also several areas of concern and risk that businesses must understand. For example, many companies do not have formal policies in place to address remote work and are merely following guidelines. Remote work arrangements made on an ad-hoc or case-by-case basis can expose a business to significant risks. Other businesses are granting work from anywhere requests on a temporary short-term basis without looking at the tax implications of an employee working in another domestic or even international location. Some states require tax withholding even if someone works one single day in that state. It may seem innocent for someone who is a resident of Ohio to request to work for a summer from their vacation spot in the Hamptons, or a villa in Italy, but it could trigger personal tax obligations, social security issues, corporate tax nexus, immigration problems, cybersecurity risk, or other compliance issues.
Location-Based Wage and Hour Issues
Compensation, pay, and tax withholdings are all based on location and jurisdiction. Employers must be mindful of multi-state and local tax implications as employees request flexible work arrangements. It is also important to document where employees live and work to ensure compliance with Fair Labor Standards Act and state wage and hour laws.
The Fair Labor Standards Act requires that overtime eligible, or “non-exempt,” employees’ time worked is tracked accurately and synchronously. Employers must ensure that remote and hybrid workers understand their role in timekeeping and follow the organization’s time and attendance policies. When an employee relocates to a new area of jurisdiction, whether it be permanently or temporarily, employers must review applicable wage and hour laws and adapt processes accordingly. For example, some states require daily calculation of overtime and different rates of pay.
Convenience of the Employer Rule
There are five states that currently tax income even when the employee does not live or work there. Also known as the “Convenience of the Employer Rule,” these states (Arkansas, Delaware, Nebraska, New York, and Pennsylvania) handle withholding as follows:
If the employer requires an employee to work in another state (for the employer’s convenience), then withholding is taken where the work is performed.
If the employee chooses to work in another location (for the employee’s convenience), then withholding must be made in both locations—though some states have reciprocal tax agreements and/or provide credits for taxes paid to other states to avoid double-taxation.
There is no question that it is confusing, and many members of Congress have been trying to enact the Remote and Mobile Workers Relief Act of 2021 to “limit the authority of States or other taxing jurisdictions to tax certain income of employees for employment duties performed in other States or taxing jurisdictions.” Businesses will need to monitor changing policies and regulations as many states have prioritized tax compliance for mobile employees.
What is Apportionment?
In addition to payroll tax withholding and reporting requirements, employers also need to be aware of other payroll implications associated with hybrid workers including unemployment insurance withholding, worker’s compensation, and disability. Businesses must also calculate business income tax apportionment as part of the tax compliance process. Apportionment drives the calculation of state taxable income.
Check with your applicable state and local jurisdictions to find out what their tax apportionment formula is based on, typically a combination of the following factors: receipts, property, and payroll. According to The Tax Adviser, “Sourcing of payroll apportionment purposes usually either follows a hierarchy similar to that used for unemployment compensation purposes, or is based on employee withholding rules…Therefore, the shifting of employee work locations, whether on a permanent or hybrid basis, has the potential to affect the payroll factor.” That is why it is so important to track and maintain reliable data on remote working locations and wages.
Get Help to Prevent Payroll Tax Withholding Errors
An article in SHRM’s HR Magazine notes that “businesses can leverage modern payroll technology platforms to address these multi-state payroll tax compliance challenges.” These solutions automate multistate payroll tax calculations and ensure businesses remain in compliance with tax calculations, filings, and reporting requirements. Alternatively, the article points out that businesses can outsource payroll administration to ensure compliance.
To learn how your business can confidently manage multistate payroll taxes and maintain compliance, read Asure’s Multistate Payroll Tax Management White Paper. This guide examines jurisdictions with different reporting requirements, multistate work from home complications, reciprocal agreements, wage and hour rules, best practices to avoid common missteps.