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Hybrid Work Brings Considerations for Taxes, Benefits

May 16, 2022, 8:10 PM

Employers seeking to implement a hybrid work system or to entice employees back to the office with benefits should explore the tax consequences of either action, two tax professionals said May 12.

A 2020 Deloitte survey indicated that two-thirds of respondents planned to continue to support remote work at least part-time after the Covid-19 pandemic, Jason Russell, a tax managing director with Deloitte, said.

Employers often feel like they are behind their peers on implementing remote work policies, but are at various stages of implementation, Russell said.

Employers that “said ‘we’re done’ have frankly revised their policies two and three times,” he said. “If you’re not quite finished, don’t worry about it.”

Employees are willing to quit if they find their employer’s remote work policy is unsatisfactory, Russell said.

However, the “idea that people work somewhere else than their primary office is not new, we’re just calling it something different,” Russell said at the American Payroll Association’s 40th Payroll Congress in Las Vegas.

“This isn’t new. What is new is how big a percentage of your workforce this impacts,” he said.

Tax Withholding

The basic rule for income tax withholding is that tax is withheld where services are performed, according to Ken Fitzgerald, a tax manager at Deloitte.

Many exceptions exist, including states with reciprocity agreements or thresholds of days worked before withholding is required, Fitzgerald said.

Five states — Arizona, California, Indiana, Oregon, and Virginia — allow employees to claim “reverse credits” on income tax returns when an employee works in one of those states and lives in another, Fitzgerald said.

Instead of claiming a credit in the resident state for tax withheld in the work state, with a reverse tax credit the employee claims a tax credit in the work state and the work state’s withholding can be reduced to the extent the home state’s withholding is required, Fitzgerald said.

Connecticut, Delaware, Nebraska, New Jersey, New York, and Pennsylvania have “convenience of the employer” tests. If a nonresident employee normally working in one of those states works at home in another state, they are still considered to be at the normal work location unless they meet the test, Fitzgerald said.

Before the pandemic, employees were often set up to only be taxed in one state, but now employers must be more aware of employees’ tax treatment, Russell said. Hybrid work can have “real annoying tax consequences” if employees live in a location without an income tax and commute somewhere that has one, he said.

For New York, the pandemic “didn’t exist, as far as withholding is concerned,” Russell said. The state’s audits of work locations have historically relied on the employee’s setup in HR systems and communications to employees about assignments, he said. During the pandemic, he did not see employers tell employees that they were formally transferred to being a home-based worker or to another state.

Work locations should also be updated to be consistent in all systems, not just payroll systems, he said.

One employer that assigned fully remote employees in other states to New York offices for internal purposes caused New York to think those employees were working in the state, Fitzgerald said.

While combinations of reciprocity, tax credits, and withholding requirements may appear to sometimes require withholding for two different states, “in reality, it has been rare for a company to double withhold, unless the company is itself paying that second tax,” Russell said.

A New York employee working remotely in California could result in taxation by both states, whereas business travel by the employee to California would not generally result in double taxation, Russell said.

Benefits

Russell and Fitzgerald commonly receive questions about enticing employees back to the office and how to provide them nontaxable meals or other benefits, they said.

Employers can provide pretax parking and commuter benefit programs. “Those are the nontaxable ways that you can support your employees getting to the office,” Russell said.

Paying other commuting costs is a taxable benefit, Russell said. If an employee working in Las Vegas moved to Cheyenne, Wyo., and was assigned their home as their work location, paying for that employee to attend a meeting at the Las Vegas workplace would be nontaxable because it would count as a business trip, not a commute, he said. If the same employee’s work location was still Las Vegas, the payment would be taxable as a commute, he said.

Taxability of employer-provided meals is another common question, Russell said.

While occasional parties or meals are considered nontaxable, employers that provide employees meals every day “can expect a fight from the IRS and an employment tax audit,” Russell said.

A common question during such audits is whether employees were required to eat meals at the workplace, Russell said. He suggested that employers consider temporarily requiring meals to be eaten at the workplace while employees are being encouraged to return. “That would definitely meet what the IRS keeps telling us,” he said, adding that it is not a permanent solution.

To contact the reporter on this story: Jamie Rathjen in Washington at jrathjen@bloombergindustry.com

To contact the editor on this story: William Dunn at wdunn@bloombergindustry.com