Work Anywhere: Mobility Tax Considerations for Remote Workers - Part 3

    

Work Anywhere Part 3 reduced

While many companies have employees working from home, or even working from anywhere in the world, they are faced with many questions that have taken on new meanings. Questions like: What state or country are my employees working from? Are they creating taxable events in the location they are working from? Is the company and employee still compliant with tax authorities? And while these are all questions you have likely had to ask in the past, now more than ever, it is important to find the answers. As you continue to evaluate your company’s need to keep employees working from a place outside of their usual office, here are further considerations you and your company should keep in mind.

Travel costs to company’s location

Although the idea of allowing for remote workers is that they do not need to appear in the office, there will likely still be an occasional need for them to attend meetings or other events at the company’s location. Individuals that normally work in the company’s location would not typically be reimbursed for travel to that location. Any related expenses incurred by the employee in their regular travel to work would be considered the normal cost of commuting, with reimbursement to the employee considered taxable income by the IRS.

However, under a remote worker scenario, an employee could incur substantial travel costs for a meeting at the company location, such that they may expect reimbursement for travel, lodging, meals, and other travel-related expenses. For this reason, it will be important for the company to define what travel costs, if any, will be reimbursed for remote workers to travel to the company’s location while they are regularly scheduled to work remotely.

Download our free Work Anywhere Checklist for questions to consider when implementing a work anywhere program.

If the company does pay the costs for a remote worker to travel to the company’s location for an event or meeting, there is the potential for this item to be taxable. Consider an example of a remote worker who travels back to your company’s US headquarters once a month and is in the office for parts of three days during each trip. It is expected that this pattern of employment will continue. By the end of a typical calendar year, this employee would have 36 days at the headquarters location. Will you be able to exclude the employee’s travel expenses because they relate to a business trip?

For employees in the US, the IRS provided guidance in Chief Counsel Advice 200026025 that if an individual travels to the same location on a recurring, but infrequent or sporadic basis for a period of more than one year (i.e., not a short-term assignment) and the individual spends more than 35 days in a calendar year in that location, then any travel costs paid for by the company would be taxable. As such, any company-paid or reimbursed expenses relating to these trips would need to be added to taxable income. If the company will also provide tax gross-ups for US federal, state, and social security as applicable, it is possible that the company’s cost for the travel reimbursements described above could more than double.

Cost considerations of implementing a remote worker or work anywhere policy

As has been reflected in our blog series, the establishment of a remote worker policy may result in additional administration and tax costs for your organization. Some of the costs may be obvious, such as those that might be required to establish policies, new payroll systems, or expand the use of vendors to address compliance requirements. Other costs may be less so, such as the potential increased cost of business trips for your remote workers, potentially even requiring tax gross-up payments. All of these costs will need to be factored into budgets and communicated to business units and other stakeholders.

However, keep in mind that there may also be opportunities for costs savings. Consider an employee who had been working in your company’s headquarters in San Francisco, California, but who now would like to work remotely for an indefinite time period from his birthplace of Lincoln, Nebraska. Would your company continue to offer the same compensation package, despite the significantly different cost of living between the two cities? In addition, some companies may be able to reduce the physical footprint of their office space, thereby saving rent, construction expenses, utility, and maintenance costs.

Although the full costs and benefits of a remote worker policy are beyond the scope of this series, it will be critical for companies to consider questions such as the following:

  • Will the establishment of a remote worker policy be critical for your organization’s ability to recruit, hire, retain, and develop the best employees?
  • What are the risks and incremental costs to the organization related to the remote worker policy?
  • How can you manage company and employee risks and focus on talent management, while also reducing costs?
  • Do you have the internal resources to manage the policy that best meets your organization’s needs?
  • If not, is it more cost effective to leverage the expertise of your tax, legal, and payroll vendors rather than hire additional personnel?

A peek into the future and the impact on costs of long-term assignments

It is too early to determine how COVID-19 will impact mobility assignments going forward, so there will be a need for further analysis on this topic as the “new reality” sets in. However, as a quick peek into what the future might hold, let’s consider the impact of a long-term assignment for the scenario described in Part 2 of this blog series.

As you may recall, our prior example involved an employee who 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 move to Colorado on an indefinite basis. The employee remained an employee of the California entity, but had become a tax resident of Colorado.

Now consider if this employee is subsequently sent on a two-year tax-equalized assignment to Singapore from Colorado rather than from California. The company might incur additional costs due to the following:

  • Cost of living and housing adjustments will typically be higher for a Colorado to Singapore move than for a California to Singapore move, resulting in additional allowance costs for the company.
  • Hypothetical tax withholding for Colorado state income tax purposes will generally be less than hypothetical tax withholding for California, resulting in less hypothetical tax withheld by the company.
  • For a two-year assignment, California residency can be broken, but Colorado residency can generally not be broken, resulting in more state taxes to pay by the company.
  • To the extent there are additional costs due to the three items above, all those items would result in additional income for US federal tax purposes and thus increase the company’s tax gross-up costs.

While we have outlined some issues to keep in mind when thinking about creating a remote worker policy for your organization, there are many additional factors to consider--more than can be adequately captured in a blog series. As a next step, seek guidance from your mobility tax provider and other strategic mobility vendors. You can also download some of our free resources:

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.

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Author Brett Sipes

 
Brett is Managing Director for GTN’s Pacific region and has over 20 years of experience in providing mobility tax services. He joined GTN in 2006 and is responsible for managing all aspects of the Pacific region along with providing tax compliance and consulting to Pacific region clients. His straightforward and detail-oriented approach to answering complicated tax questions provides mobility program managers with cost-savings and simplified approaches to managing their mobility programs. bsipes@gtn.com | +1.619.758.4083
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