Taxing remote work in 2021
- Employers forced to address multistate tax-withholding issues
- Taxing states have patchwork of requirements
- Some employers may need to register in new states
- Country-wide solutions proposed, but resisted
How states with income tax requirements are addressing the confluence of workers who are working remotely in other states, maybe their state of residence, or maybe not, will continue to be an uncertainty into 2021. Many employers have been forced to reckon with the potential that they are liable for tax payments for employees outside of their assigned business location.
Some states have issued temporary reprieves on requiring employers to set up tax withholding in a new jurisdiction (which will expire), others are holding down their existing requirements for taxing nonresidents and residents that had been working in other states, but are telecommuting in their state. These requirements vary from state-to-state and are extremely difficult to apply, especially when employees may not be informing their employer where they are working from.
An additional corporate tax issue can arise when a single worker teleworking in one state can trigger a status of business-related nexus in that state for the company, subjecting it to corporate filing and tax requirements as a business entity in that state.
There have been efforts in Congress to set standards for state approaches to taxing teleworkers and employees who cross state lines to work. These have met with much resistance from states that fear they will lose revenue if their policies are forced to change. Look for more impetus to address this issue in 2021.
Business expense considerations in 2021
- Can reimbursed business-related costs incurred by teleworkers be taxable?
- Employers need to apply necessary accounting processes for these expenses
- Guidance prohibits salary replacement, details how exclusions from income work
- Some states require employers to reimburse costs of doing business remotely
Along the lines of telework issues that payroll will need to be aware of, there’s the issue of whether certain reimbursed expenses from employers to workers in their homes are taxable. Accounting for legitimate business expenses, so they can be excluded from tax as additional wages for workers, can be tricky. Generally, flat cash reimbursements and stipends need to be included as wages, while more deliberate payments that can be verified (through bills, for example) and are specific to an expense have a better chance of being excluded. The IRS has an extensive program that explains how some procedures to pay expenses qualify for favorable tax treatment, and some don’t.
Further, in some of that IRS guidance, there are prohibitions on employers seeking to use some of these expenses to offset full salaries, or characterize the reimbursement payments as part of employee wages, discounting the amounts paid for those purposes from someone’s agreed-upon salary or even hourly wage. In an environment when many who remain employed are experiencing salary cuts, some may find it attractive to use business expense reimbursements to artificially fill some of the gap.
Finally, don’t forget that state laws may have a play here as well with business expense plans. California, for example, requires employers to reimburse employees for costs of their mobile phone plan if the employee is using the phone for business purposes. There may be more states passing such requirements in 2021.