Our tax attorneys have been following the numerous changes taking place in the American workforce during the Covid-19 crisis. For example, social distancing and other safety orders have forced certain businesses to allow employees to work remotely from home or another location. However, specific challenges are associated with this new employment model, especially where the IRS is concerned. Tax problems may occur for some individuals, depending on the details of their work-at-home arrangement.
A Continuing Trend
Approximately 75 percent of finance executives in a Gartner’s survey said that even when the pandemic is over, they are thinking about allowing approximately five percent of their on-site workforce to continue working remotely on a permanent basis. This information was published on March 30.
Tax Obligations May Change Based on Work Location
If you are one of the many Americans who are now working from home, you may find yourself with an unexpected tax bill. This depends on the geographical location of your remote office. A tax lawyer would almost certainly tell you that this complexity may increase if you reside in one state but have gone to another area of the country during the pandemic, such as a second home or a friend’s or relative’s house. According to Eileen Sherr, a CPA and manager at the American Institute of CPAs, you will owe money in certain states from the moment you begin working there. Such states typically require that you file a form called “nonresident return,” and they also require your employer to withhold tax money.
Understanding Tax Nexus
Tax nexus, also called tax presence by accountants, refers to the way states levy taxes on employees and businesses. Sales, payroll, and property are the three factors that determine the amount of tax levied. Therefore, sending employees to work remotely in a different state may give the employer a presence there, thus subjecting the company to corporate income tax obligations and state payroll tax registration requirements in that location. For workers, it means they are subject to tax withholding in the state where they now work remotely. This is because taxes are typically paid in the state where the income is earned.
Additional Considerations Regarding Work Location
Multiple states may come into play, depending on your individual circumstances when working remotely. Certain states have agreements with neighboring states for the purpose of streamlining the tax process for cross-border workers.
For example, Pennsylvania and New Jersey have a reciprocal personal income tax agreement, meaning residents of New Jersey working in the Keystone state will not be liable for Pennsylvania income taxes. Similar arrangements are also in place in the Midwest and the Mid-Atlantic regions of the country. However, these agreements differ greatly from one area to the next. For this reason, residents of the Golden State should consult a California tax attorney when planning to work remotely on a permanent or long-term basis. It is also wise to consult with a tax attorney to determine how long you can work in a different state before being subject to that state’s tax reporting requirements.
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