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Remote Employee Relocations Create Tax Season Issues for Employers

In the wake of the COVID-19 pandemic, many businesses have shifted to a hybrid or fully remote working structure. Remote positions have allowed many companies to retain employees throughout the pandemic to maintain growth and profits.

In some cases, however, the positives of remote work are overshadowed by complications brought on by remote worker relocations. When an employee relocates to a different state, it can create significant tax issues for employers.

Explore how remote employee relocations affect businesses throughout the country and what you can do to minimize the impact on your company’s finances.

General Tax Liability for Businesses

No matter what state your company is based in, you must follow federal and state-level wage and income tax withholding requirements. Each state carries its own withholding rules governing the amount your business must take out of employee wages for each paycheck.

For example, if your business is based in California and all your employees live and work in-state, you must structure your withholding amounts to match California’s income tax rates. These range from 1% to 12.3%, depending on income bracket.

As a business owner in California, you must also withhold state disability insurance (SDI) taxes and federal withholdings for Medicare and Social Security and meet California wage and labor laws. These include providing minimum salaries, paid vacations, Paid Family and Medical Leave (PFML), and overtime pay.

If you fail to comply with these labor or tax regulations, your business may face penalties. A Department of Labor (DOL) investigation, IRS fines, DOL fines, or even legal consequences may result.

If the IRS discovers an error, they will typically send a lock-in letter that notifies you of the mistake and how to correct it. If you do not fix the withholding error, the IRS will require your business to pay the difference in withholding amounts. They may also require you to participate in the Withholding Compliance Program, which takes three consecutive years of error-free reporting to complete.

Remote Employee Relocation Impact on Employers

In the last two years, the push toward remote work has led many businesses to retain and hire employees who work from home. If your employees work remotely but remain in your business’ state of operation, there is generally no difference in your tax withholdings or labor law obligations.

However, if one of your remote employees moves out of state, it can create significant tax issues for your business. For instance, if your business is located in Orange County, California and several of your remote workers move from California, you must determine what changes need to be made regarding your tax and labor law liability.

Changes that affect your business reporting and withholding requirements may include the following areas:

  • Minimum wage laws
  • Rest and break laws
  • Income tax withholding obligations
  • Vacation policies
  • Paid leave laws

One specific issue that California businesses may need to focus on is the worldwide income tax required by the state. California residency laws and tax requirements differ from many other locations. California requires part-year residents to pay California income tax, and those who receive any income from a California business must pay California income tax as well.

For example, suppose one of your remote employees moves to Washington, Texas, or Florida, where there is no income tax. In that case, you may still need to withhold California income tax if they lived in California for part of the year.

How Can You Minimize the Effect of Remote Employees Who Relocate?

Implementing tax planning strategies and stringent vetting procedures for remote employee relocations is essential. Planning taxes for remote employees requires that you stay on top of where your remote employees live and work to ensure that you follow the correct tax withholding and labor law compliance regulations. Implementing or adding remote work agreements and employment policies will allow you to deal with potential tax issues from remote employee relocations proactively. Change your policy and accompanying documents to require workers to notify the company before moving out of state.

Working with a tax planning and advisory firm like Windes to assist your business with maintaining compliance and developing a forward-thinking tax strategy is one of the most effective actions you can take to help you create a risk-minimization plan. Windes can aid you with:

  • Compliance requirements
  • Cash flow management
  • Federal, state, and local tax reporting
  • Multi-state tax returns
  • Sales, use, and local tax review
  • Strategies to minimize taxes for multi-state operations

Obtaining business accounting services can ensure you meet the income tax withholding required for remote employees who relocate. Windes can also help your company develop a long-term strategy that streamlines your operations regarding remote employee relocation.

Strengthen Your Accounting and Tax Strategy

If you have implemented a hybrid or fully remote working environment for your business, staying on top of your remote employee residency changes is essential. Doing so can prevent an interruption to your cash flow and ensure you are withholding the proper amount according to the appropriate state requirements.

Work with Windes to develop a long-term tax strategy and ensure compliance regarding remote employees. Windes is committed to strengthening your accounting and tax strategy so that you can increase cash flow for your business. We provide Los Angeles, Long Beach, and Orange County with tax strategies and accounting services tailored to the needs of your business.

Connect with us today at 844-494-6337 or to discuss your tax and accounting goals and how our services can benefit your business.

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