Work from anywhere (WFA) has largely replaced the concept of mobility in our collective work-life lexicon, marking an incredible long-term shift in workforce culture. The compelling potential benefits to WFA highlight the need for robust policies that serve employees and employers alike while addressing the significant tax challenges stemming from employing a large-scale remote workforce.
Success requires much more than simply giving employees permission to log on from their guest bedroom, a boardwalk café, or anywhere in between. WFA is a buzzword soup filled with promises and pitfalls, and success comes down to policy and implementation.
WFI’s primary promise is that employees will spend more time focusing on their work if they do not have to worry about where—and when—the work gets done. But the potential benefits of WFA are broader than a talent-retention trade-off that creates an employment culture like the one among independent contractors in the technology industry. WFA also promises improved employee well-being, extreme flexibility, higher productivity, access to a global talent pool, cost savings, organizational agility, and environmental sustainability.
But what about the cost? In a WFA environment, there are significant risks related to complexity and interpersonal disconnection, as well as management, training, and technology gaps.
Boiled down to the basics, here is what a simple WFA package can look like:
- Work and live anywhere (maybe with limitations).
- Specify a home location (with permanent moves still requiring approval).
- Go ahead and travel, but don’t work in any one location other than your home location too often.
- Get your work done and still collaborate with your team.
- Get together in person occasionally.
- Compensation is no longer based on geography but instead on the role you fill.
It is easy to see why employees would chomp at the bit for flexibility like this.
Before Covid-19, mobility applied to fewer than 6% of all employees. By the fourth quarter of 2021, more than a third (36%) of middle-market companies that RSM surveyed stated they had employees working remotely who weren’t doing so prior to the pandemic. Almost half (48%) of respondents had made remote work a permanent option for some employees on a full-time basis, and another 42% were considering it.
Now, upwards of 37% of employees, with a particularly high concentration in the technology and professional services industries, are leaving behind empty desks in favor of permanently remote work.
But many are doing it under very simple remote work policies that could completely miss the immense hidden tax implications of WFA for a business and its employees.
Although many taxing jurisdictions provided limited tax relief for remote work early in the pandemic, tax legislation in the US at the federal and state levels and internationally has not kept pace with how the working world has fundamentally changed. This has led to low tax compliance thresholds in certain jurisdictions or country combinations depending on local laws and treaty availability.
As a result, businesses and their employees are facing material multijurisdictional tax compliance obligations and potential nuisance tax compliance where the simple act of meeting a tax filing obligation is more burdensome than the tax itself. When spread across an entire enterprise, tax risk can spiral out of control quickly to where the return on investment of WFA is no longer palatable.
To mitigate this risk, a WFA policy must be adequately operationalized. It must address risk and cost assessments, call for clear work approvals and tracking, and always have one eye turned toward ongoing tax compliance.
One of the major multifaceted tax risks embedded within WFA policies is the cross-border mobility that is explicitly allowed or presumed based on the language of the policy. Cross-border workers, whether across state or national lines, can trigger a litany of tax obligations—including corporate income tax, employment tax and social security, property tax, other direct and indirect sales and use tax—in addition to an employee’s personal tax obligations.
In a WFA policy, cross-border flexibility could be restricted entirely or subject to clear limitations, such as allowing an employee to work outside their home jurisdiction for a couple of weeks or even up to 183 days a year. However, many policies are silent about time and jurisdiction limitations, leaving businesses and employees in a state of uncertainty.
Tax Absolution Myth
Of the many myths that persist in the tax world, the myth of tax absolution for an employee who works less than 183 days in any one jurisdiction is relatively widespread—perhaps because it is convenient.
The concept of 183 days is important in the state and international contexts. Myriad tax rules use days of physical presence as a bright line to determine an employee’s tax residency, an employer’s permanent establishment from an international perspective, and the applicability of any potential international tax treaty relief from income sourcing provisions.
When an employee is below a residency threshold, working presence in a country or state as a nonresident can still attract personal tax obligations based on income sourcing and apportionment rules. Presence in a jurisdiction can also create permanent establishment with a need for transfer pricing or state nexus, depending on the nature and activities of the employees, sometimes from day one. It is important for an employer to know not only where employees are working, but what, exactly, they are working on.
Even when there may not be any monetary tax obligation, a requirement to run a paper drill may exist to affirmatively invoke a treaty or otherwise signal to a tax authority that a taxpayer owes no tax despite some amount of presence within its borders. While multijurisdictional filings are known and understood by tax practitioners, an employee working in four jurisdictions over the course of a year, for example, may be surprised—and quite possibly dismayed—to learn of such obligations.
Monitoring and managing a workforce’s global footprint, particularly when employees are crossing state or international borders, is central to an effective WFA policy. There are helpful tools available to the market, and multiple different solutions have bubbled up in the past two years to achieve the promise of WFA and to do so compliantly. These include employee geolocation travel tracking technology, the meteoric rise of professional employer organizations, and workflow tools that help employees initiate requests and facilitate employer approvals, sometimes backed by artificial intelligence.
Whatever technology or other processes are involved, companies need to clearly define efficient guardrails based on their tax and reputational risk tolerance and communicate them effectively to employees.
On the taxpayer side, this could include allowing employees WFA flexibility but only in jurisdictions where the enterprise operates or within a certain region. It also could entail prohibiting travel to certain high-risk locations, requiring employees to track travel or self-report in real time, limiting certain activities while outside of the home location, or placing greater WFA restrictions on C-suite executives and other key management.
Meanwhile, jurisdictions could help determine their economic destiny by setting policies that attract a WFA workforce. They could raise filing and withholding thresholds for nonresidents, disregard de minimus days of presence for sourcing and determinations of nexus and permanent establishment, and attempt to reduce or eliminate technical filing obligations when the actual collection potential is nil.
As we move forward into a broad WFA environment, companies need to refine their strategies to attract and retain talent and adopt a policy that allows them to quickly adapt to changes in domestic and international tax codes. A policy that is operationalized, supported by research, and enabled by technology will limit unpleasant surprises while fulfilling WFA’s promise.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Brian Kirkell is RSM US’s Washington National Tax State and Local Tax leader, serving as a technical resource for the firm’s national practice across all state and local tax service lines. He is a regular writer and speaker on state and local tax issues, and is a professor at the George Washington University Law School teaching state and local taxation.
Rachel Simon is a Senior Manager in RSM US’s Washington National Tax Compensation and Benefits practice. She advises clients primarily in the executive compensation arena, with a focus on global equity and deferred compensation arrangements and cross-border workforce issues.