As remote work has become a mainstream employment option, domestic taxation concerns have never been more pertinent. By 2025, an estimated 32.6 million Americans are expected to be working remotely, representing approximately 22% of the workforce. The rise of “work anywhere” arrangements has transformed how and where people conduct their work, making it crucial to understand the tax implications of these arrangements.
For the purposes of this article, we define a “remote worker” as an employee who lives and works in a jurisdiction different from where their company is located. For employees who live and work in the same jurisdiction as their company, there are generally minimal mobility tax issues that arise even if the employee is working from home rather than commuting to an office.
Remote work arrangements
When a company allows employees to work remotely, a key consideration is whether the arrangement will be temporary or permanent:
- Temporary remote work policy: The expectation is that the employee will eventually return to working onsite at a company office within six months to one year.
- Permanent remote work policy: The company will allow an individual to move to an entirely different location from where their company is located, with no expectation of having the employee in the office on a regular basis.
There can be advantages and disadvantages of either approach that go beyond mobility tax issues; however, the key takeaway is that the tax treatment may vary between temporary and permanent remote worker scenarios. It is important your company understand the rules and have a process to identify these scenarios to manage risks and compliance requirements effectively.
Tax compliance considerations for remote workers
Even a temporary remote worker can create tax reporting and withholding requirements for the company. And states vary in their leniency regarding tax reporting and withholding for remote workers. For example, Illinois 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.
Follow these steps to manage and address the tax compliance intricacies for your remote workers:
Understand where your employees are working
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?
Your mobility tax provider will be able to assist you in creating a process to review and track your organization’s remote work requests.
Review your corporate tax position
When employees work from different locations, it can impact a company's corporate tax obligations. To understand these implications, companies should review their tax presence or "nexus" in various jurisdictions. Nexus is typically determined by three main factors:
- Payroll: Where employees are located and paid
- Property: Location of physical assets
- Sales: Where transactions occur, or customers are located
Given these factors, companies may need to:
- Review state payroll registration requirements in new locations where employees are working
- Assess potential corporate income tax obligations in these jurisdictions
Additionally, individual employees should evaluate their personal income tax filing requirements in both their temporary and permanent work locations, as these may have changed due to remote work arrangements.
By carefully examining these aspects, companies can ensure compliance with tax regulations across multiple locations where their employees are working.
Understand and apply the multi-state tax compliance rules
After identifying the locations of your remote workers and assessing your corporate tax position, the next crucial step is to understand your organization's multi-state reporting and withholding obligations. Simultaneously, it's important to ensure your remote workers are aware of their individual filing obligations.
While these requirements often correspond to the location where work is performed, it's important to note that each state has its own specific thresholds and requirements.
Furthermore, the interaction between different states' tax laws can create additional complexities.
Three key multi-state tax concepts that can significantly impact the taxation of your remote workers include:
State tax credits
To address multi-state taxation issues, individuals have the option to claim a credit on their resident state income tax return for taxes paid in another state. This credit serves to prevent double taxation and minimize any potential company-paid income tax gross ups, as outlined in your organization's policy.
It is crucial to understand that the amount of tax credit an employee receives may be limited if their resident state has a lower tax rate compared to the state where they worked.
Furthermore, timing issues may arise due to the fact that the credit is claimed on the tax return. This can result in a delay between when taxes are paid through withholding or other means, and when the double taxation is resolved through the receipt of the tax credit.
"Convenience of the Employer" rule
A handful of states have adopted the “Convenience of the Employer” rule. This rule generally states that if an employee works remotely from a state other than their employer’s location for their own convenience, rather than for the employer’s necessity, the income may still be subject to the employer's state tax.
Essentially, if the remote work is not required by the employer but is done at the employee’s discretion, the state where the employer is located may claim the right to tax that income.
Reciprocity
Several states have reciprocity clauses whereby you pay taxes in the state you live in instead of where you work. A list of the reciprocity agreements can be found here: State-by-State Reciprocity Agreements.
As we move forward, companies and individuals will need to continue reviewing domestic tax issues that arise from remote work arrangements. Staying vigilant and regularly reviewing your tax policies will help ensure compliance.
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.
