Nearly 40% of office workers don’t know that there may be tax implications of their remote work locations, and only a third of workers report all days worked away from their office jurisdictions, according to a new survey.
In the pandemic, the result is significant risk that employers are blindsided by unexpected tax bills.
Most office workers have been working away from the office during the pandemic, according to the survey, published by Topia, a human resources software company. It found that 43% have worked completely remotely since March 2020, and an additional 21% indicated they had spent the majority of their time outside the office.
Before the global pandemic, relatively few employees spent enough time working outside of their office’s jurisdiction to put their companies at risk for additional payroll taxes, audits and unemployment insurance. But widespread office closures in the age of Covid-19 means many more are far from their former home bases, putting companies at risk of millions of dollars of big unexpected tax bills.
“The risk used to be small enough that you could brush it under the carpet, but that’s completely changed,” Nishant Mittal, senior vice president of business travel at Topia, told Bloomberg Tax. “Now it is much too much to brush under.”
A single state audit before the pandemic’s work from home surge cost one Topia client company nearly $5 million, Mittal said. If every state now launched an audit at once it could cost that same company $25 million, he said.
Companies are generally responsible for witholding payroll taxes for any salary an employee earns while working in a jurisdiction. Unless they track their employees—and many don’t—they won’t know about their liability unless the workers themselves alert them to location changes.
Topia operates a cloud-based platform for managing workforces worldwide. The results were based on a survey it commissioned of 1,250 U.S. and U.K. knowledge workers in global companies.
The Organization for Economic Cooperation and Development urged in January that countries not change determinations of where companies have a taxable presence merely because employees have temporarily relocated due to pandemic lockdowns, and some have adopted that approach.
In the U.S., states differ in the thresholds they use to determine employee tax nexus, and a few have temporarily waived nexus for the pandemic. But the danger is illustrated by a Bloomberg Tax & Accounting survey in November that found that even just a few telecommuting employees could trigger corporate income tax nexus in 37 states.
Uniform mobile workforce legislation that would address the issue is currently percolating in Congress, although similar bills have died quietly over the past decade.
“It would be really retrograde for Congress to impose another physical presence rule,” said Darien Shanske, a tax law professor at the University of California-Davis. He alluded to the U.S. Supreme Court’s groundbreaking 2018 ruling in South Dakota v. Wayfair, which permitted states to impose sales tax collection duties on remote retailers based on economic activity, instead of the previously required physical presence, in a state.
States Get Aggressive
A battle between New Hampshire and Massachusetts over telecommuter taxes could wind up in the U.S. Supreme Court, where the justices have asked the Biden administration to weigh in. If granted, the case could determine the fate of related tax laws in New York and elsewhere. Other states, facing widespread budget shortfalls, are watching the case carefully and gearing up to increase nonresident auditing.
Before an employee spends time working in a place outside of the state when their office is located, companies must register with the jurisdiction’s department of state, but even multibillion-dollar companies aren’t registered in every state.
“The penalties for not being registered are a lot less than the penalties for failing to pay taxes,” said Tim Noonan, a tax attorney at Hodgson Russ in New York City. “It varies state by state just like the requirements themselves vary, but it’s less of a concern than the tax issue, which is going to be more expensive and messy.”