By: Joe Violette
Supervisor, Cordell Neher & Company, PLLC
The current pandemic has resulted in many businesses being forced to send their employees home, and work-from-home life has become a mainstay especially in knowledge-based jobs that do not require the employees’ physical labor. Many of these industries are not going back to the workplace anytime soon, and lots of companies are looking at making these types of work arrangements permanent. As a result, it is extremely important to understand how this can create wrinkles for both employers and employees when it comes to their tax situations.
Here’s what employers and employees need to know about remote work and the impact it can have on taxes.
Tax and labor considerations for employers with remote employees
Nexus – Employers who have transitioned their workforce to remote work must be conscious of potential nexus implications due to employees who are now working from another state. Working out of state from the employer can create physical nexus which means the employer will be responsible for the taxes imposed from the state the employee is now located in. This could include taxes on income, gross receipts, and sales and use from both the city and county level. States can often have very different interpretations and rules on specific tax situations, so it’s important not to just rely on your understanding of Washington taxes when doing business in other states.
Some states have waived these nexus rules or have adjusted in light of COVID-19 including: Minnesota, Indiana, Ohio, New Jersey, Mississippi, Pennsylvania, North Dakota, and the District of Columbia. However, Washington and most surrounding states in our general geographic area have not adopted new nexus rules yet. If you recently have had remote workers begin working in other states, it is best to check with your CPA to ensure you’re following nexus laws properly and aren’t exposing your company to potential tax issues.
Labor and employment law – Changes in an employee’s location across state lines can result in new wage and hour rules, termination of employment considerations, noncompetition agreements, trade secrets protections, and paid sick and family leave rules. Employers will want to be mindful of worker’s compensation insurance as states usually require employers to register and obtain premiums to cover the employee in that state. Additionally, unemployment insurance is also required by states for employees even if the employer operates in a different state.
Remote worker supplies – Employers who purchased items and provided them to workers in order to move operations remote may deduct those expenses on their tax return. As these supplies are usually purchased for non-compensatory business reasons, employees do not need to pay taxes on them. Employers who reimbursed employees for purchased supplies deemed “ordinary and necessary” should have policies in place to protect the employee from taxation.
Consistent and accurate communication with employees during this time is key in order to avoid employer and employee tax violations. Be mindful that employee tax obligations are not the employer’s responsibility, so remind your employees to stay vigilant about their personal tax situation.
Tax implications for employees working from home
Double-taxation – Double-taxation can be a large burden for employees living in one state and working in another. Double-taxation occurs when the resident state doesn’t provide an employee with a credit on their return for taxes paid to their employer’s state. Since Washington doesn’t have a state tax this probably won’t be an issue to your employees, but it is something to be aware of.
Home office deductions – The Tax Cuts and Jobs Act (TCJA) of 2017 removed the itemized home office deduction for unreimbursed expenses exceeding 2% of AGI. This means that even though new remote employees have had to procure supplies during the pandemic, and they were not either directly purchased by the employer or the employee was not reimbursed, those expenses are not tax deductible.
Self-employed individuals are still eligible for the home office deduction if they are purchasing their own supplies. If a contracting client purchases supplies for them, they are tax deductible for the client, but not the self-employed individual.
Relocation – If you’ve permanently relocated across state lines during the pandemic, you will need to file tax returns for both states. Even temporary relocations of six months or longer may require tax returns to be filed in two states, depending on various personal factors. It is likely states will be monitoring these moves closely in order to recover lost revenue, as states struggle in 2021 and beyond with budgetary shortfalls.
Employers who have never operated with remote workers prior to the pandemic could face significant headaches come tax time. Likewise, employees who are working in one state and living in another could face large tax bills in 2021. For assistance, please don’t hesitate to reach out to Cordell, Neher & Co., PLLC at (509) 663-1661.