Remote workforce and unexpected state tax implications

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September 2020

Overview

In response to the COVID-19 pandemic, many states have declared states of emergency and imposed temporary social-distancing measures and other restrictions. Many businesses, in turn, have implemented work-from-home requirements for their employees. Since March, many employees have been required to work remotely and leverage technology and new ways of working to accomplish their jobs. 

In the June 2020 PwC US Remote Work Survey, three out of four employers called work from home (WFH) a success.  Additionally, 73 percent of employees would like to work remotely at least two days a week even once COVID-19 is no longer a concern. Similarly, 55 percent of executives are prepared to expand options for employees to work outside the office.  

It’s no surprise that organizations are rethinking their long-term workforce and workplace strategy to consider a hybrid work-from-home model that allows flexibility as to where employees work. However, what may be a surprise is that these changes may have significant unexpected state tax implications and could create potential tax risk for both individuals and their employers. Even the presence of a single employee in a state could result in a company being subject to tax obligations in a state where it had no prior filings or did not conduct business in the past.

The takeaway

Most states’ shelter-in-place orders, and the tax relief tied to them, are for specific periods of time. While many states are extending their orders, it is expected that, as states continue to reopen their economies, the ‘shelter-in-place’ orders will be lifted and the tax relief will end. In that case, employers no longer may be able to rely on the temporary relief issued by states that previously relieved them of nexus, apportionment, and/or employer withholding and reporting requirements for employees working remotely. Additionally, many states are facing significant revenue shortfalls and may step up their efforts to identify non-compliant companies. 

Consequently, companies should continue to monitor the work locations of their employees to assess potential nexus exposure once government orders are lifted and/or state and local authorities’ temporary relief expires. When companies are no longer protected by temporary relief provisions, these states and localities may impose nexus or an income tax or sales tax filing requirement. 

Similarly, employers should reassess potential withholding tax implications once government orders are lifted. Once employers are able to determine their return to work strategy (e.g., office opening, business travel), there could be a shift in employees’ primary work locations resulting from more formalized remote working arrangements. This likely would result in the need for additional state and local withholding and unemployment tax filings if employees are continuing to work remotely.

As employers begin to re-open offices and employees gradually return to their normal work locations, employers will need to develop a robust process to track employees’ work locations and duration of time at each location in order to assess state tax filing profile, cash management, and provision preparation.

If companies are considering a long-term transition to a remote workforce, tax modeling is recommended to help put in place a tax-efficient structure. To that end, companies should assess shifting operating models and remote workforce locations and examine whether policies, procedures, systems, and related controls are adequate to meet compliance and risk goals.

There also should be a broader remote workforce planning assessment and strategy in light of COVID-19, including:

  • assessing any current state tax risk, and with appropriate stakeholders, defining an acceptable risk tolerance based on overall company risk profile and parameters
  • determining a process for identifying and tracking remote worker employees through time reporting, expense reporting, or other methods to support correct withholding and monitor nexus risk 
  • arranging for the tax function to have a voice in developing an appropriate governance structure, including policies and protocols that facilitate employee remote working that are in line with the company’s objectives 
  • considering the implementation of an employee management company to gain better control over the use and deployment of the workforce and to increase other operational efficiencies 
  • revisiting the character of intercompany transactions from a transfer pricing perspective to facilitate alternative sourcing of receipt analyses (i.e., sales of tangible personal property vs provision of services) that may help mitigate nexus risk.

For more information regarding state personal income tax exposure when working in a non-domicile state, please read our September 8, 2020, Insight, available here

For more information on creating the office of the future, please read our Strategy& article here

Contact us

Peter Michalowski

State and Local Tax Leader, PwC US

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