To say these are unprecedented times would be something of an understatement. GTN, along with our friends and affiliates in the mobility industry, was built on the movement of human capital around the globe for business. To date, the worldwide spread of the coronavirus (COVID-19) is proving to be the exact opposite with countries shutting borders, banning travel, and restricting social interaction.
In this time of restricted mobility, we are seeing the rise of the work-from-home (WFH) economy, and right now, our “new normal” is the remote worker. Even before COVID-19, this was a rising challenge to employers around the world as more and more employees look to take advantage of advancing technology, allowing them to literally work from anywhere with a strong Wi-Fi signal.
When work was tied to a physical office or project site, managing tax and social security risks were known issues that had to be addressed. Now as that tie is being broken, these issues can become more uncertain and exponentially larger.
The impact on US state tax revenue from remote workers
While technology has advanced quickly, the methodology used by tax authorities is comparatively outdated. This is because the sourcing of income for tax purposes remains based on the physical location of where personal services (work) is performed. And to date, this has made logical sense. If we could personally change the source of income based on where we were paid from, for example, without consideration of our physical location, we would all be paid from Dubai or some other tax-free location.
Let’s consider the impact of this current WFH economy on the tax position of employees and their employers. Take for example, New York City. New York is served by the Metro North, New Jersey Transit, and PATH train lines all bringing hundreds of thousands of out-of-state passengers daily into the city to work, in addition to car and bus commuters. All these employees are taxed on their earnings by the state of New York because their work is performed within the state. Under the current lock down however, these employees are no longer performing their work in New York state. So, if taxation is based on physical location, New York state could lose tax revenue, while Connecticut and New Jersey could see a corresponding rise in tax revenue. Although uncertain, it is also possible that the “convenience of the employer” approach adopted by New York could also apply. This is discussed in more detail below.
From an employer’s perspective, this creates payroll compliance challenges. Do you know where your people are working? Does your payroll system have the capacity to handle multi-state withholding requirements? Where should you be paying unemployment insurance for out-of-state WFH employees? Do you need to register employment status in a new state? This, in turn, raises questions about state exposure for corporate tax purposes. These questions are not only relevant at this time of crisis; they are questions that should be addressed by any employer that allows remote working as part of their culture.
The rise of “telecommuting” in the tri-state area (Connecticut, New Jersey, and New York) of the US had already moved states to protect their tax revenue through “convenience of employer” rules. Under these rules, the state can include employment income for days worked remotely by an employee in another state if this was deemed to be at the convenience of the employee rather than the employer.
For example, James works for a NY Wall Street bank, lives in Connecticut, works Monday through Thursday in the office, and works from home on Friday each week at his own request. Under the “convenience of employer” rules, 100% of his earnings remain New York sourced income. At the same time, Connecticut would not accept a credit of New York tax on the one fifth of his income that it considers Connecticut source income (based on where James was physically working). The outcome is that James gets double taxed at the state level on one fifth of his income. A position that many, including the two current US senators for Connecticut, think is grossly unfair.
There are rules and court decisions relating to this that are beyond the scope of this blog but do make for interesting reading. One would hope that New York will not be enforcing these rules vigorously in relation to the current situation, but they will need to find revenue sources if the economy takes a substantial hit.
Employer compliance for international remote workers
Take the issue of international remote working and things get even more complicated from an employer compliance perspective. If your CEO is running the company from her Canadian lake house versus from the corporate office in the US, a company may have some significant tax and social security exposure. Throughout Europe and along the US/Canada border, cross-border commuting is a common occurrence. If those employees are now going to be working remotely from their Home country for an extended period, the organization needs to address the tax risks and compliance requirements that could result.
In both Europe and North America, there are protections in place to ensure cross-border commuters are treated fairly for income tax and social security, but these protections are generally subject to qualification criteria based on work time spent in the Home or Host countries. For example, days commuting into the US from Mexico and Canada are excluded for the purposes of the substantial presence test for US tax residency. This is the case if you regularly commute, per IRS publication 519 “you are considered to commute regularly if you commute to work in the United States on more than 75% (0.75) of the workdays during your working period.”
Given these tests, even a short WFH period could lead to the taxpayer failing to qualify for certain relief, particularly for employees who are already on partial WFH schedules. Some countries are already responding to these issues, however, and are relaxing or adapting their rules to consider COVID-19 related changes.
The UK tax office has already provided guidance that certain periods of UK presence related to the virus may be excludable from the tax residency test. Similarly, Belgium, Germany, and the Netherlands have all announced measures to reduce the impact on social security coverage for impacted employees. It will be interesting to see how such measures will be adopted across the rest of Europe and around the world. In North America, we have seen the US federal, state, and Canadian authorities extending their filing and payment deadlines for 2019 returns, but so far nothing has been outlined for relief relating to virus impacted locations during 2020.
At this time of great uncertainty, there are probably more questions than answers when it comes to the global tax and social security implications of remote working. With some commentators predicting that the current crises may change how we all work in the future one thing is certain, the impact and difficulties of remote work will continue to be a growing challenge for mobility and tax departments well into the future.
If you have questions about your remote workforce and the potential tax and/or social security impacts, we are here to help. Schedule a call with our team to discuss your specific situation. This is an unprecedented time in the world’s history, and only by working together, will we be able to resolve issues and keep businesses running as normal as possible.