April 14, 2021 | Payroll Software | Posted by Scott Schapiro
Payroll & Compliance Implications with the “Work From Anywhere” Workforce
Office environments had been thrown into total disarray by COVID-19 as offices closed last year, continued to stay closed longer than anyone thought possible, and now most are slowly trying to reopen. Changing environments meant direct implications to payroll and compliance as we knew it.
The reality and practicality faced by many organizations is that they really did not know how long this would last. Because of this, many employers rolled the dice on 2020 and have either begun implementing workforce related measures or are setting their sights on some version of normalcy later in 2021—either with permanent changes being made or with short-term alternatives, like hybrid schedules or target reopen dates. The common thread is establishing the new payroll priority and implementing it. Let’s break down what’s currently happening with payroll taxation, what companies are doing and what they are taking precautions of.
The State Tax Turmoil
As a direct result of COVID related workforce changes, many states implemented measures tied to state and local government orders that gave direction to employers as to their personal income tax withholding responsibilities. With 2020 now in the books, employers in those states that implemented COVID-related payroll relief may see that relief eliminated or scaled back
For example, New Jersey allowed employers with employees who were regularly based outside New Jersey, but now working within New Jersey to continue the other state withholding and reporting while the COVID emergency was still in place, if they chose to do so.
However, on October 19 the New York Department of Taxation and Finance published a series of FAQs, one of which addressed the question of whether an employee whose primary office is in New York but who has been telecommuting as a result of a COVID closure still has New York state income tax responsibility. The Department asserted that yes, unless the employer has a “bona fide” office from which the employee has been working, then this could be considered New York source income, in accordance with its long-standing Convenience of the Employer position in this scenario (even pre-COVID).
Not surprisingly, New Jersey fought back by introducing state Senate Bill S-3064, which directs a legal review of the situation and how to best protect New Jersey residents in this case.
Similar to the asserted New York position, Massachusetts requires employers with pre-pandemic Massachusetts based employees to withhold and remit Massachusetts income tax to the Commonwealth, even if services were provided outside the state. This has recently resulted in New Hampshire filing a Motion for Leave to File a Bill of Complaint with the U.S. Supreme Court against the Commonwealth of Massachusetts for improperly and unconstitutionally taxing non-Massachusetts residents/employees, even though no work was performed in Massachusetts. This case, should the Supreme Court decide to take it, could have broad implications for the states that view this similarly, such as New York and Pennsylvania.
How to Navigate itSo, what should employers be considering now that we are almost a quarter of the way through 2021?
Here are a few thoughts:
- Consider your organization’s overall position with respect to employment and be prepared to work with that. If the office will remain closed indefinitely, consider establishing payroll and HR policies that support that. If there is a set date to return, move in that direction. It is important to align the payroll reporting aspects of your business to the direction of the workforce.
- Decide if you will allow people to work remotely given that your company has a Work from Home (WFH) or Work from Anywhere (WFA) policy. There is a huge, and potentially costly, difference between the two. WFH generally aligns an employee to their resident state to perform services, which allows for clear withholding and reporting compliance. WFA can be just that…anywhere. Imagine an employee going on a 20-state road trip and working in all those states along the way. How could you possibly comply with all of those state reporting and taxation requirements? Consider specific guardrails for your employee population in order to protect them and your organization from tax issues.
- Work with your tax department as you consider WFH vs. WFA. Consider a hybrid version, which allows employees to work from specific states that the company deems appropriate. There could be states where, for non-payroll tax purposes, the company just cannot have employees perform services. You can lock out employment occurring in that state, if properly handled.
- Beware of global employees. In this case I am not referring to global travelers visiting another country where you are obtaining business. I am referring to someone deciding they are going to spend this spring or summer in the South of France providing all their services to you virtually. This opens the possibility of creating something called Permanent Establishment in a foreign country—essentially having the U.S. entity be deemed to have opened an office there. This could create enormous tax and legal issues. Again, you can build guardrails around this using workplace policies.
- Establish strong corporate communications with your employees and put in place your own policies. For example, a New York-based employee and resident says they are going to spend their immediate future working in Florida; they ask you to stop their New York withholding and give you a new Form W-4 with a Florida address. You may want to tell them not do that, as they will still owe New York income tax on ALL their compensation at year end and may be significantly under withheld. However, if there is nothing in your corporate rules prohibiting this, and if they approach the process properly, this may be technically permissible—although not necessarily advisable (see the Convenience of the Employer test previously noted) as New York may still require taxation. Beware of giving personal tax advice in this case, even though you think it is for the employee’s own good.
As an organization you can set some rules, such as in the WFH vs. WFA space, but in many other areas, you are merely the conduit to proper compliance. With states running short on funds, it is likely that income tax and unemployment tax audits could increase over the next few years, and it is up to you to protect the company and comply as best you can with the new work relationships many of us are still facing.
PLEASE NOTE: The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.
Scott Schapiro is the founder and President of EX4 Payroll Tax Consultants, LLC, which began serving clients in October of 2020. Prior to starting his own firm, Scott was with KPMG LLP for 25 years, a principal in KPMG’s Global Mobility Services (GMS) practice for 17 years, and the Principal in Charge of KPMG’s national Employment Tax practice for twelve years. With over 36 years of experience in the federal and state payroll and payroll tax arena, Scott is highly qualified to assist in all matters of employment taxation for organizations of all sizes and industry focus. During his career, Scott has provided services to clients nationally, and coordinated a team of professionals dedicated to the area of payroll taxes. As a sole practitioner, Scott continues to provide personalized services to his clients, and advises companies of all sizes and in all industries on a variety of complex employment tax issues related to all aspects of payroll taxation.