The COVID 19 pandemic has forced companies to have their employees move from their normal offices to working remotely. A virtual workplace facilitates social distancing but can have significant tax implications for both individual employees and their employer. Generally, your taxes will not be affected when working in the same state in which your company is based. However, the situation may be different if you relocate temporarily to another state.
Below are some of the consequences from a tax perspective:
You can unknowingly establish nexus
Employees who work remotely in a different state from the one in which their company is located run the risk of establishing a tax nexus. A tax nexus gives the taxing authority room to establish a connection with the business and pursue additional revenue. Mostly, nexus will be created for income and sales tax purposes. Remote work nexus can come with new tax obligations and present challenges when filing taxes for individuals and businesses.
You may be subject to double state-income taxation
When your workstation is in a different state, you may find yourself with a hefty tax bill. Depending on the state you are working from, and the period of time you have spent there, you might owe income tax to two states, especially if the two states do not have a reciprocal personal income tax agreement. The state of your primary residence can tax your worldwide income while the other state may tax the income you earn within the jurisdiction, resulting in double taxation and an increase in tax burden.
You have to deal with complex and conflicting state tax laws
Income tax rules and regulations vary by state. Employees who live in one state and work with another will have to know where they do not have to pay taxes and make sure they follow the required order when filing multiple state tax returns. As a taxpayer, you will also need to keep an accurate record of the days you have spent working in various states because the state returns you file should be consistent with your credit card and cell-phone records in the different states.
Corporate tax implications
In these times of coronavirus, some states consider remote work occasioned by the pandemic as normal in-office work. As such, depending on the state in which an employee works, there can be corporate tax implications. The employer may be required to withhold taxes on behalf of their employees and file a corporate income tax return in the state in which work is performed. As such, businesses should keep track of their employees to avoid penalties associated with tax violations.
Temporary relocation to a lower-tax state
In these harsh times, some people may consider temporary relocation to a lower-tax state to save money. Unfortunately, you will be able to reduce your tax payments only if you move to the new location permanently. However, before moving to a lower-tax or no-tax state, you will need to learn more about the consequences of working remotely from these areas to help you make an informed decision.
At the end of the day, different states have different tax treatments. To avoid adverse tax implications when working remotely, you should start by finding out how the state in which work is performed will treat your income.