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Remote Work Tax Implications, Home Office, Travel, and More

At a Glance

Main Takeaway

Remote work has grown increasingly popular in the past three years, with many businesses opting for flexible, work-from-home options for their employees. Nearly 16% of U.S. companies are fully remote, and 66% of employees work remotely part-time. About 36.2 million employees are expected to work remotely by 2025.

With this shift in the workplace comes new remote work tax implications for businesses, making it crucial for companies that use remote or hybrid work arrangements to understand potential tax liabilities in different states as nexus is established.

Next Step

Explore remote work tax implications that may affect your business and how Windes business tax services can help you navigate remote work tax considerations to help you take advantage of tax credits and incentives in 2023.


Business Considerations

Hiring remote employees creates unique considerations for your business, both internally and externally. Your company must prepare for the accounting and tax preparation tasks of managing remote employees, such as payroll requirements, state nexus establishment with subsequent registrations, and home office and travel reimbursements to employees through corporate policies.


Determining a Tax Home for Employees

A tax home refers to an employee’s regular place of business or post of duty, regardless of where they live. The tax home determines an employee’s tax liability and which state’s tax laws apply to the employee’s income.

To determine an employee’s tax home, you must consider where they perform most of their work duties. If an employee lives in Kansas and performs their work from a home office, their work home would be the state of Kansas, even if your business is domiciled or located in California.

An employee’s tax home can affect tax obligations to the applicable state or local governments. For example, your company may have to register and pay taxes in Illinois if an employee’s tax home is there and your business is in California.


Considerations for Payroll Reporting

If you hire remote workers outside your current state(s) of registry, certain thresholds can trigger payroll reporting requirements in those newer states. Reporting thresholds include the number of days worked in-state, the amount of compensation throughout the year, or location criteria. For example, employers with workers in Texas must use the state’s location of services checklist to determine if they must report their wages to Texas.

Preparing payroll taxes for remote employees can be complex for employers. Understanding your state’s filing requirements is vital to reporting compliance and minimizing tax liability. For example, if your business is based in California, you must withhold income tax if an employee lived in the state for at least half the year.


Establishing Nexus for Employees Who Work Out-Of-State

When your company hires a remote employee with out-of-state payroll, you may establish a new nexus related to sales tax, also known as a physical presence, in that state. This happens when the worker creates a taxable connection between your business and the state where they reside.

Establishing nexus may result in additional filing requirements and the responsibility to report sales revenues in those states. Specific criteria for establishing nexus vary by state but are based on factors such as the number of days worked in-state, the amount of compensation received, and the type of work performed.

For example, in California, a business establishes nexus if it is “doing business” in the state, such as having employees, owning or renting property, or storing inventory there. California is a state where a small amount of activity will lead to multiple tax types.

If a business has established nexus in California, it must register with the California Secretary of State and obtain a California Seller’s Permit. The company must also collect and remit California sales tax on taxable sales made to customers in California.

To determine if nexus has been established, seek the advice of a tax professional at Windes. We can help you determine if you have a nexus in the state and ensure you comply with relevant regulations.


Using IRC Section 139

The COVID-19 pandemic was declared a disaster by the federal government, and the covered period for expenses to qualify under Section 139 started on March 13, 2020. IRS Section 139 is a provision that offers tax-free treatment for disaster relief payments made by employers to their employees.

To be eligible for tax-free treatment under Section 139, disaster relief payments must be reasonable, necessary, and directly result from the declared disaster. Wages do not fall under the definition of a Section 139 payment.

While you still have the option to provide disaster relief payments and other support to employees related to the COVID-19 pandemic, the expenses must meet the definition of a qualified payment under Section 139. These benefits are set to expire on May 11, 2023, making it essential to work with a tax planning partner like Windes to help you take advantage before they end.


Providing Home Equipment

Employers can generally reimburse employees for certain home office expenses through an accountable plan. This plan must meet the ordinary and necessary business expenses criteria under IRC Section 162.

According to the IRS, expenses related to remote work include the cost of home office items like monitors, printers, phones, and office supplies, the cost of installing new or expanded internet service, and the cost of increased utilities.

These expenses are tax deductible for the employer as long as they are reimbursed under an accountable plan. Your business can hire remote employees and provide necessary equipment without an additional tax burden; however, you must provide records of the stipend or reimbursement used for tax reporting to deduct the expenses.


Commuting and Travel Reimbursements

If your business hires remote workers, you may face challenges in determining what travel or commuting expenses to reimburse, which you can deduct from the company’s taxes.

As a general rule, commuting costs between an employee’s home and work are not reimbursable to the employee nor deductible for the employer. However, if an employee’s home is their primary place of work under IRC 280A, you may reimburse them for travel between their home and other required worksites they visit in a business-related capacity.

For example, California requires reimbursement for travel expenses such as lodging, food, and gas. When taking on remote employees in California or another state, you must consider policies that take into account the reimbursement of travel and commuting costs.

You can work with the tax professionals at Windes to implement tax planning strategies like revising your compensation structure or limiting the required number of in-office days to maximize deductions and minimize liability for this tax issue.


Establish Beneficial Tax Planning Strategies With Windes

Engaging a remote workforce is necessary for many businesses in the post-Covid landscape. Although a remote or hybrid arrangement can offer new opportunities for your business, it also brings on unique challenges regarding tax liabilities & reporting, and accounting operations.

Contact the tax professionals at Windes to help your business enact a tax planning strategy that allows you to take advantage of all credits, deductions, and incentives available in your state of operation.


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