Many businesses have transformed since the COVID-19 pandemic. Organizations experiencing human resource constraints are getting more creative when it comes to retaining and recruiting employees—including a growing remote workforce. But hiring remote employees can create uncertainties for companies to navigate.
Remote Working Tax Implications
Explore these frequently asked questions related to remote working tax implications.
What’s the Definition of Tax Home?
Generally, an employee’s tax home is the regular place of business or post of duty, regardless of where they live. It includes the entire city or general area of a business or work location.
The IRS hasn’t published updated guidance following the COVID-19 pandemic. Thus, taxpayers should follow previous rules and guidance and apply them to their specific facts and circumstances.
It’s important for businesses to understand the definitions of both home and office in relation to flexible workforces for employees who can be:
- 100% remote
- Working in the field
What Are Considerations for Determining Payroll Reporting?
The remote workforce ushered in by the COVID-19 pandemic seems here to stay, resulting in the need to meet new payroll reporting requirements.
If a company has remote employees in a state where it hadn’t already registered, there will be certain thresholds being met that could call for registration in states where those employees are located.
If certain thresholds are met, such as the number of days worked in-state or amount of compensation, then the company needs to register for payroll reporting with those states. Note that the company may be required to complete other registrations with the state aside from just income tax withholding.
Employers will want to remind their employees of their individual tax reporting obligations. Given that employer withholding taxes are based on employee residence, employees need to understand the individual filing requirement in their own states as opposed to where the company is located—unless there’s reason to file in the state where the company is located.
An example reason for filing in the company’s state would be if the employee visits the office location in the other state and meets the states specific thresholds for personal income tax filing requirements, among other possible personal reasons for activity in that state.
What’s the Impact of Remote Employees on Nexus?
When a company has a remote employee with out-of-state payroll, that typically creates nexus in that state for the company, unless a specific exception is met. When nexus is established, also known as physical presence, a company can create additional filing requirements for themselves, in addition to having to withhold income taxes on the employee’s wages.
A company is typically recognized as doing business in a state when any remote employee located there works for the company. This employee could establish nexus, possibly creating new income, franchise, and sales and use tax obligations.
Can IRC Section 139 Still Be Used?
IRC Section 139 deals with disaster relief payments from the employer that are generally tax free to the recipient. The COVID-19 pandemic was declared a disaster by the federal government and the covered period for expenses to qualify started March 13, 2020.
Section 139 disaster relief payments need to be reasonable, necessary, and the result of the declared disaster. Wages aren’t considered a Section 139 payment. IRC Section 139 can still be used related to the COVID-19 pandemic if the expenses meet the definition of a qualified payment under IRC Section 139.
If an organization is interested in providing disaster relief payments and other support to employees under Section 139 for other payment related to disaster relief (COVID-19 or otherwise), the organization could implement a policy for these types of payments.
What Are Business Considerations When Hiring Remote Employees?
When hiring remote employees, there are several business considerations that should be thought, both internally and externally. Below is a list of items to be considered.
- Well documented working arrangements, such as through employment agreements
- Additional administrative tasks of having remote employees
- Payroll requirements and registrations with the states, such as state tax withholding and unemployment taxes
- State nexus establishment and adding new footprints in new states
What Are the Options for Providing Home Office Equipment?
Internal Revenue Code (IRC) Section 162 permits employers to reimburse employees for legitimate job-related expenses deemed ordinary and necessary, such as a computer, monitors, printer, or internet service.
An employer has many options on how to structure home office reimbursement expenses, such as a stipend or reimbursement policy. What’s important is that it be made under an accountable plan, meaning, a set of procedures that ensures that employees don't get reimbursed for personal expenses.
How Can a Company Reimburse Home Office Expenses?
An employer can reimburse employees for certain home office expenses through an accountable plan. As discussed above, the main factor for reimbursement is the IRC Section 162 standard of an ordinary and necessary business expense.
According to the IRS, ordinary and necessary expenses related to the COVID-19 pandemic can include a range of expenses related to remote work, health care, and childcare, such as:
- Home office items, such as monitors, printers, phone, and office supplies
- Cost to install new or expanded internet service
- Cost of increased utilities
Would Reimbursement be Taxable or Nontaxable?
The accountable plan allows employees to receive tax-free money for expenses while the employer deducts the expense. An employer should be ready to substantiate the business connection and cost of the expense.
How Is Commuting Defined and Applied to Travel Reimbursements?
Transportation expenses between an employee’s home and the main place of work are considered commuting expenses.
Daily transportation expenses employees incur while traveling from home to one or more regular places of business are generally nondeductible commuting expenses, with some exceptions.
One can deduct daily transportation expenses incurred going between the residence and a temporary workstation outside the metropolitan area where they live.
Daily transportation expenses can be deducted if an employee has one or more regular work locations away from the residence or the residence is the principal place of business, and they incur expenses going between the residence and another work location in the same trade or business.
Travel expenses are the ordinary and necessary expenses for traveling away from the home for the job. Generally, a tax home refers to the entire city or general area of a main place of business or work, regardless of where a family home is.
Can Employees Working From Home Write off Their Office Space?
The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the miscellaneous deduction for home office expenses for tax years 2018–2025, making employees not eligible to claim the home office expense deduction.
How Is the Convenience of Employer Rule Used to Determine Travel Reimbursement?
Convenience of employer generally means that daily transportation expenses incurred by an employee between the primary residence and employer’s office are personal expenses.
These personal expenses aren’t eligible for either a deduction by an employer under section 162(a)(2) or tax-free reimbursement to an employee—unless they’re excluded as qualified transportation fringe benefits. This rule is subject to exceptions, however.
For example, if an employee’s residence is the principal place of business, within the meaning of IRC Section 280A, then the transportation costs between the home office and employer’s office may be deductible by the employer and eligible for tax-free reimbursement to the employee.
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For guidance on the tax implications of a remote workforce, contact your Moss Adams professional. You can also visit our Tax Services page for additional resources.