The Tax Implications of Remote Workforces

While remote work is likely here to stay in some form or fashion for many companies, there are tax implications that should not be ignored by both employees and employers.

The COVID-19 pandemic has brought about unprecedented change across the globe and in almost every corner of society. You don’t need us to tell you that, yet it’s worth remembering. Perhaps the area affected the most by this seismic shift has been labor. In the past two years, there has been a fundamental re-evaluation of the nature of work.

The Rise of Remote Work 

Telecommuting, or remote work, was slowly but gradually increasing before the pandemic hit the United States in earnest in March 2020. Once lockdowns began, working virtually was adopted in almost every industry as a safeguard and reaction to public health guidance on the coronavirus. At its peak, 62% of U.S. workers were remote. As of December 2021, that figure was closer to 26%

While some industries require certain employees onsite to continue operations, many jobs can be done from anywhere with the right technology and support. The up-and-down nature of the pandemic will likely cause remote or hybrid work to continue for the foreseeable future and become an expectation of job candidates. Employers should examine ways to maximize their hybridized workforce and help their employees be productive and comfortable in a virtual environment.

We’ve shared multiple articles that cover the pros and cons of a remote workforce, but one factor that merits further examination is the tax implications of working remotely. That includes everything from how an employee that primarily works remotely or in multiple states should file their taxes to how a company handles tax obligations.

How Do Remote Workers Get Taxed

Many employees love the freedom that remote work provides. Staying connected to the office while visiting friends or relatives, attending an international seminar, or escaping to a warm climate during the winter months is liberating. Background check company GoodHire recently published a survey that found 68% of Americans prefer working remotely to being in the office.

There are also financial reasons motivating certain employees to work remotely. For example, some people might opt to work in a state like Texas that doesn’t levy an individual income tax, even if their employer is based somewhere like New York, which has a considerably higher income tax rate. That’s where they could run into some problems.

A September 2021 article from BDO explained:

“For individuals in U.S. states, having dual residency may also pose a risk for long-term remote teleworkers. During the pandemic, it was common for workers to work remotely from vacation or other homes. Since their primary residence remained in their old state, along with other connections, they did not abandon their domicile. However, if they teleworked from the vacation home for more than 183 days (or met other state-specified requirements for determining residency) they may have established ‘dual residency’ in another state. As a result, the individual could be subject to double taxation and/or state withholding on their income. The impact on an individual’s estate and gift tax planning should also be considered.”

One of the biggest takeaways is that employees and employers should try to work out tax arrangements before telecommuting begins. Keeping open and direct lines of communication between all levels of a workforce is key as well. That way any problems that crop up can be tackled early.

Tax Considerations for Companies with Remote Employees

Companies should be aware that if just one of their employees is working from another state, it could have a significant impact on their tax filings. Unfortunately, many of the tax relief policies introduced during the early stages of the pandemic were temporary and have now expired. That means that companies should be especially cautious in order to avoid double taxation or additional issues.

As flex-office space, or offices designed to accommodate a limited number of employees at varying times, becomes more popular, businesses will have to get used to having their staff spread out over a large geographical area. This could end up saving companies money on rent and other expenses, but it might lead to some tricky taxation scenarios as well. If you are in charge of the daily operation of a company or office, it would be a good idea to read up on the latest laws and policies and contact the IRS with questions, if necessary.

Smaller regional companies will likely bear the brunt of the headaches associated with taxes, while larger corporations that have offices or an established footprint in other states where remote workers are settling may be able to avoid much trouble.

Some employers may attempt to reclassify full-time employees working remotely as independent contractors. While this may be advantageous for management, it could be cause for concern among employees. Being reclassified might lead to a loss of benefits.

How Benefits are Impacted by Remote Work

If benefits such as healthcare, life insurance and retirement funds (e.g., 401ks, IRAs, etc.) are important to you as an employee, then you should be particularly aware of your status as a remote worker. Same thing goes for companies and organizations.

Every state has different healthcare laws, so employers will need to keep up with changes to stay compliant. In an effort to adapt, some companies have switched their health plans to a virtual system that can be accessed from anywhere. A 2021 survey conducted by the Business Group on Health and Fidelity Investments found that 70% of companies now offer a virtual component to their health and wellness plan.

There’s no debating whether remote workforces are now part of the business landscape for the foreseeable future. They offer too many advantages to both employees and employers alike. However, they also present some potential issues, like tax compliance, if the proper steps aren’t taken early in the planning process.

Have questions about your remote versus on-site work arrangements? We’d love to help! Our corporate relocation specializes in programs and policies that keep employees engaged and safe wherever they’re located!