As a result of COVID-19, many business functions are taking steps to create and update multiple policies within their organization, and the global mobility department is no exception. While restrictions remain in place for “traditional” mobile employees such as business travelers, assignees, commuters, and transferees, an even larger group of remote workers—including work-from-home or “work anywhere” employees—is creating new mobility tax issues for companies to consider.
In Part 1 of our blog series, we highlighted three mobility tax considerations for temporary vs. permanent remote workers, domestic vs. international remote workers, and considerations for employees who travel while working remotely. In Part 2, we will compare the US state tax withholding considerations for temporary vs. permanent remote workers.
What to withhold for temporary remote workers
From a US tax perspective, one of the key issues for a company to consider in relation to remote workers will be the additional state wage reporting and withholding obligations.
Let’s assume that an employee was living and working in San Francisco, California prior to the COVID-19 crisis. Soon after the COVID-19 crisis began, the individual’s employer allowed them to work remotely in Colorado for a period of six months. For this scenario, we assume the employee remained an employee of the California entity, maintained their tax residency in California, and did not establish Colorado tax residency. We also assume the company has nexus (i.e., a taxable presence for corporate tax and reporting purposes) in Colorado.
In this scenario, the following payroll reporting and withholding should occur on the wages earned while the employee is temporarily living and working in Colorado:
- Wages should continue to be subject to California unemployment tax.
- Wages should continue to be subject to California state disability insurance (SDI) or voluntary disability insurance (VDI).
- 100% of wages earned while working remotely in Colorado should be reported as taxable wages in both California and Colorado.
- Colorado income tax withholding should be withheld on Colorado wages.
- California income tax withholding should be withheld on California wages. Note that a reduction to California income tax withholding can be allowed to the extent that there is Colorado tax withholding and with appropriate payroll documentation. Given that the California tax rates are generally higher than the Colorado tax rates, there will likely be a need for some California tax withholding in addition to the Colorado withholding.
This is just one illustration—there are many other, more complex situations that can occur regarding state withholding. For example, some states have concluded “reciprocity” agreements, whereby an individual living in State A and working in State B will only be subject to income tax in State A. Some states are also adopting “convenience of the employer” rules, which could subject a remote worker to state taxation based on their employer’s location if the employee is working from home for their own convenience rather than because it is needed by their employer. Additionally, states may have enacted specific COVID-19 provisions that can change the historical reporting and withholding obligations for employees impacted by COVID-19 restrictions.
What to withhold for permanent remote workers
To help illustrate some of the differences between a “temporary” remote worker policy vs. a “permanent” remote worker policy, we will use the same facts from above, but will change one item. Instead of the employee temporarily living and working in Colorado for six months, we will assume the individual will permanently move to Colorado, become a Colorado tax resident, and cease being a California tax resident. The individual will remain employed by the California company. In this scenario the following payroll reporting and withholding should occur on the wages earned while the employee is permanently living and working in Colorado for a California employer:
- Wages should be subject to Colorado unemployment wages, not California unemployment wages.
- Wages should NOT be subject to California SDI or VDI.
- Wage reporting and withholding should occur in Colorado only, not California.
Potential trap for permanent remote workers
What should happen if the employee in the "permanent remote worker" scenario occasionally visits the office in California and works in California as a non-resident? Technically, there is likely a requirement to report California wages and withhold California tax (and then reduce the Colorado tax withholding) for the time spent working in California.
Historically, many companies have ignored the state non-resident wage reporting and withholding obligations for employees that have occasional trips to other states. However, with the widespread news of companies allowing for remote workers, it is likely that states will become more aggressive in requiring non-resident state wage reporting and withholding. Accordingly, for companies that will implement remote worker policies, we recommend they also re-visit their non-resident state wage reporting processes.
In Part 3 of our series, we will dive further into the potential tax implications related to remote workers. If you have questions about how these items will impact your company’s global mobility department or remote worker policy, schedule a call with our team to discuss your specific situation.