Here, There, Everywhere! Top 10 Employment and Tax Considerations When Employees Work Remotely
Stites & Harbison Client Alert, January 6, 2022
by Shannon Antle Hamilton and Erica Horn, CPA, JD, Dean Dorton
It is not a secret that many employers and employees found themselves in remote working relationships because of COVID-19. As it became apparent that the pandemic was not going to be a short-term interruption in our work lives, some employees made dramatic changes in their work location. Some moved to the beach, some chose an extended stay at the cabin in the woods, and others may have moved to be closer to their family. Perhaps, you have had this experience and, as an employer, you were surprised to learn the location of some of your employees. Now working remotely is here to stay.
Here are 10 things you need to know about the employment law and tax consequences of remote work.
- Draft a Remote Working Policy or review and revise an existing policy. The pandemic created an immediate need for employees to leave the workplace and perform work remotely. Some employers already had existing “telecommuting” policies and procedures, while others did not. The ones that didn’t have policies or procedures had to implement remote working policies based on pandemic-driven issues. As employers are now reviewing whether to allow employees to continue to work remotely, they should review existing remote aka telecommuting working policy and procedures, as well as remote working agreements.
- A Remote Working Policy is for the employer’s benefit, not the employee. A remote working policy should reiterate that the arrangement is not an entitlement, is not necessarily a company-wide benefit, and in no way changes the terms and conditions of employment with the company. It should be reiterated that working remotely may be appropriate for some employees and positions but not others. It is also not to be used as a substitute for dependent or child care.
- Have a separate Remote Working Agreement (which is different from a Remote Working Policy). Most remote working policies will likely be included in an Employee Handbook. However, Employee Handbooks generally state in multiple places that the Employee Handbook is not intended to create a contract of any kind. Accordingly, don’t rely on other policies set out in the Employee Handbook to “bind” remote employees for specific issues, such as confidentiality of business or client information that might not be returned. Instead, be sure to address issues specific to the position, even if you have a template agreement.
- Example Items to include in a Remote Working Agreement. Examples of items to include in a Remote Working Agreement include:
- The need for a designated home workspace, which should be different from where the employee worked during the pandemic, i.e., the kitchen table;
- Equipment concerns (whose equipment will be used ) and other service concerns such as internet and telephone services necessary to complete the job duties;
- Whether the employer will be monitoring employee productivity by use of embedded software or other means;
- Return of all equipment, company property, and information at the time of separation;
- How often and when the employee is expected to return to the office for in-person meetings;
- Moonlighting is prohibited during the workday; and
- Any additional confidentiality provisions in case the employer needs to pursue the employee in a legal setting after the separation.
- Keep track of where the heck remote employees are working. Allowing an employee to work remotely may be giving them an inch, but some employees may take a mile, that is, miles away from their residence. Determine whether the company will allow the employee to work remotely from other states (at the beach or in the mountains) or even globally while traveling. Certain tax consequences and possible state law consequences may be necessary to follow. Still, as an employer, you have to know where your remote employees are actually working. If necessary, include that information in either the policy or the agreement.
- Determine whether COVID-19 tax-related changes for remote employees have expired. For example, some states enacted specific provisions related to remote workers at the beginning of the pandemic in 2020. However, most of the provisions were temporary. The provisions expired on a specific date or at the expiration of a state of emergency order issued by the federal or state government. So, if you have been relying on a temporary provision, check and make sure that provision is still available.
- There is a general rule, but you may need to learn the rules related to income tax withholding for the states in which you have offices, plants or other work spaces, and those in which you have employees. Forty-one (41) states impose an individual income tax. Each of those 41 states has different rules about whether and when their state’s income taxes must be withheld from an employee’s pay. While the default rule for state and local income tax withholding is that taxes should be withheld for the jursidction in which the services are performed, there are exceptions. Two of the exceptions include: (1) reciprocity agreements among states and (2) a “convenience of the employer” rule.
- Reciprocity agreements – what is good for the goose is not necessarily good for the gander. Reciprocity agreements allow an employee to work in a state other than the state in which they reside without having income tax withheld for the state in which they work. For example, Kentucky and Indiana have a reciprocity agreement for wages, salaries, and commissions, which means that Indiana does not require an Indiana employer to withhold Indiana income taxes from the pay of the Kentucky resident. As a result, the Kentucky resident will not have to file a nonresident Indiana income tax return, pay Indiana income tax, and then get a credit against its Kentucky taxes for Indiana taxes paid. However, if the employer does business in Kentucky, the employer may have an obligation to withhold Kentucky income tax. So, the Indiana employer that typically only withholds and submits Indiana income tax may have to withhold and submit Indiana and Kentucky income taxes.
- Is it the “convenience of the employer rule” or “convenience of the state” or both? Several states, primarily in the Northeast, apply the “convenience of the employer” rule, which provides that only if an employer requires the employee to work outside its jurisdiction is the employee relieved of the of income tax withholding for the state. The rule allows the employer to make a conscious decision about possibly having to withhold income tax in a different state. It also guarantees the state a steady stream of revenue.
- Nexus – Does that remote employee create an income tax or sales and use tax filing obligation? There are few things in the state and local tax arena that may be considered a given. But, the principle that the presence of an employee in a state gives that state taxing authority over the employer comes close to being a given. Thus, remote employees can create filing responsibilities for the employer for income, sales and use, and other taxes. While the amount of tax due may be nothing or next to nothing, the employer does have an increased administrative burden to avoid interest and penalties from noncompliance.
If you have questions or want to learn about this Top Ten list, we recommend you contact your legal and tax advisers or Shannon Hamilton with your employment questions and Erica Horn with your tax questions.
Interested in learning more about Employment and Tax Implications Arising from Remote Employees? Shannon Antle Hamilton, Chair of Employment Law Service Group at Stites and Harbison, and Erica Horn, Associate Tax Director at Dean Dorton, hosted a webinar to discuss the state tax and employment law implications of remote work. Click the link below to check it out.