Employers should be aware of the extra legal and payroll obligations that a remote workforce creates, payroll professionals and consultants said May 12.
Some additional payroll obligations include state and local taxes, expense reimbursements, and business registration.
State and Local Taxes
Employers should determine a remote employee’s tax obligations in a new jurisdiction or state, said Mindy Mayo, a managing director for KPMG LLP. Municipalities may create a new local payroll or income tax that affects remote employees to increase their revenues.
“You really need to research what other taxes you are going to be subject to when you go in a jurisdiction,” she said. “Are they going to have disability? Are the employees aware they may have disability withholding? Are you going to be tripping local and city municipality taxes?”
Some localities may have school district taxes that need to be withheld from a remote employee’s paycheck, she said. Seventeen states allow municipalities to levy their own income taxes in addition to state income taxes.
Employers should also employees of any loss of benefits that may occur by working in another state, added Rebecca Harshberger, the payroll tax vice president and practice lead for Entertainment Partners. Some employees may lose benefits, for example, by moving to another state.
“It’s a reverse thing as well,” she said. “If someone is moving from an SDI state to a non-SDI state you may want to let them know about the ramifications.”
Mayo and Harshberger spoke at the American Payroll Association’s 40th Payroll Congress in Las Vegas.
Expense Reimbursements for Remote Workers
Some states require employers to reimburse employees for work-related expenses incurred while working remotely, Mayo said. Examples include California, Illinois, Pennsylvania, Montana, Iowa, and New Hampshire.
These states require the employer to reimburse the employee for the entire cost of the expenses even if the employee exceeded their employer allowance, she added. Employees may need proof of their expenses, but employers will be held liable if they do not reimburse the full amount of work-related expenses.
Section 139 of the Internal Revenue Code allows employers to exclude employee reimbursements from taxable income if there is a qualified disaster, such as the Covid-19 pandemic, Mayo said. However, if an employee is not working remotely because of the pandemic, employee reimbursements might not be tax-free. If employers have a policy providing a remote-work option for employees, for example, employee reimbursements might be subject to federal taxation.
When the employee switched to remote work might also determine whether or not employee reimbursements are tax-free, she added.
“If the employee voluntarily went remote in the beginning of the pandemic, you may still qualify for Section 139,” she said. “Probably up through 2021 you would not have a problem. Now, if you are formally instituting a work-from-anywhere or remote work policy, I’d be cautious about using Section 139.”
Employers might need to register their business in states where remote employees are working, Mayo said. They might have to obtain relevant state business licenses and make contributions to a state unemployment insurance fund.
“You cannot register payroll in a vacuum,” she said. “You never want to just go in and register for state income tax withholding only because it could be tripping other obligations in that jurisdiction.”
Some employers are placing restrictions on where remote employees can work to avoid registering their business and making contributions in multiple states, she added.
Many states are experiencing slow business registration processing due to the number of businesses trying to register their companies in multiple states, Harshberger said.
“Be very cautious when you are doing registrations,” Mayo said. “And make sure your tax department is aware and that payroll is not just doing these registrations. Make sure that everyone is aware that your company is registering elsewhere.”