The COVID-19 pandemic continues to have a global impact. While we settle into the new “normal” of working anywhere, new questions related to domestic taxation have been uncovered.
For purposes of defining a “remote worker” and for this blog, we are assuming the employee will live and work in a jurisdiction that is different than where their company is located. For employees that live and work in the same jurisdiction where their company is located, there are often little to no mobility tax issues simply due to working from home rather than commuting to the office in the same jurisdiction.
State Tax Issues
One of the biggest initial considerations for a company allowing employees to work remotely is to determine if it will be on a temporary or permanent basis. For a temporary remote worker policy, the expectation is that things will return to somewhat “normal” conditions and most people will return to working onsite at a company office within six months to one year. For a permanent remote worker policy, the company will allow an individual to move to an entirely different location from where their company is located and there is no expectation of having the employee in the office on a regular basis.
There are advantages and disadvantages of either approach that go beyond mobility tax issues. However, the key point is that there can be differences in tax treatment between temporary and permanent remote worker scenarios. It is important that your company have a process to identify these scenarios so company risks and compliance requirements can be considered.
It is important to understand that even a temporary remote worker can create tax reporting and withholding requirements for the company. Although some states may show leniency with tax reporting and withholding for workers who are working from home because of COVID-19 related restrictions, others may not be as lenient. Illinois, for example, has indicated that non-resident employers may need to register and withhold Illinois income tax for an individual that has performed work for more than 30 days in Illinois.
The first step is to understand where your employees are working. Companies may need to review their payroll withholding and reporting capabilities in other jurisdictions. For example, a company with headquarters in Illinois has an employee that was previously working and living in Illinois but is now living and working in Michigan. What state withholding should be applied?
Resolving this question may involve reviewing the tax presence or nexus of a company. Generally, there are three factors that determine nexus: payroll, property, and sales. This means companies may need to review state payroll registration requirements as well as corporate income tax obligations. Individuals need to review whether they have an income tax filing requirement in their temporary location.
There may be some relief in multi-state taxation. Individuals may be able to take a credit on their resident state income tax return for taxes paid in another state. In addition, several states have reciprocity clauses whereby you pay taxes in the state you live instead of where you work. A list of the reciprocity agreements can be found here: https://tax.thomsonreuters.com/blog/state-by-state-reciprocity-agreements/
On March 13, 2020, President Trump declared COVID-19 to be a national emergency. Because of this “qualified disaster” status, companies may be able to provide disaster relief payments to individuals on a tax-free basis under IRC Section 139.
Qualified disaster relief payments are exempt from federal and most states’ personal income tax for the recipient and are exempt from federal tax withholding, FICA, FUTA, Medicare, and self-employment taxes for all parties if structured properly. In addition, qualifying payments are still deductible business expenses for the employer, even though not taxable to the recipient(s). Some potential expense reimbursements that could qualify for relief under IRC Section 139 include:
- Housing: incurred for a hotel room due to quarantine
- Transportation: incurred as a result of COVID-19, including rental cars and parking expenses
- Meals: delivery services as a result of restricted travel
- Remote work: associated with remote work arrangements as a result of the pandemic
- Medical: related to COVID-19
Keep in mind the expenses must be “reasonable and necessary” and your company should keep adequate records of the actual payments in accordance with their own policy. One important note to keep in mind is that payments for lost wages or income replacement purposes are not eligible for tax relief.
As 2020 draws to a close and COVID-19 is still pervasive throughout the world, companies and individuals will need to continue to review domestic tax issues that may have emerged due to the pandemic. Hopefully we will all see improvements in the coming year, but in the meantime, stay vigilant and continue to review your tax policies to remain compliant.
As always, we invite you to schedule a call with our team to talk through your specific situation and ask any additional questions you may have. Stay well!