TELECOMMUTING EMPLOYEES AND THE TICKING TAX-BOMB DEVELOP A POLICY THAT MANDATES WHERE WORK IS TO BE CONDUCTED AND MANDATE THAT GOOD RECORDS BE KEPT (PART 1 OF 2 PARTS)
Note: This article focuses only on the employee – a subsequent article will focus on tax and liability issues imposed on the employer
Background. Because the pandemic has forced many more workers to telecommute compared to what we have seen in the past, there could likely be significant tax implications that you may not be considering. Generally, a state and even a locality (city/county) expects employment taxes if work is done within the state where the employment generally occurs (“Employer Site”) or if the employee lives within that jurisdiction. If not for reciprocity agreements, this could mean that employees could be subject to taxes both with respect to their Employer Site and their residence area. Notably, this relates to states that impose taxes, states that are near other states where employees cross-commute, and even where the work site is in one city/county and the residence of the employee is in yet another (examples are Birmingham, Flint, St. Louis, Baltimore, Denver, Detroit, San Francisco, Seattle, and others). Many states avoid this double taxation, however, by entering into “reciprocal tax agreements” with neighboring jurisdictions – but not all.
So … What’s the Potential Problem? The potential problem could be double employee taxation at the local level or unexpected taxes, penalties and fines. The growth in telework creates a new problem — what happens with employees that telework away from the Employer Site and work at home? … whether or not they just prefer to work at home or whether the Employer requires them to work other than at the Employer Site? Where is the income to be taxed – home or Employer Site or maybe even both? Here are some examples:
- My Employer Site is in Denver – a city that has a city earnings tax -, I live outside the city, and I work from home – do I pay a city earnings tax?
- I live in Boca Raton, FL (no city and no state income tax), but I travel a lot and work at my employer site in Detroit and sometimes in Birmingham, AL as a salesman – do I pay the tax?
- I have a home in Lexington, KY that has a city earnings tax, my Employer Site is in Cincinnati, my parents live in Georgetown, KY and I use my laptop at all three locations. Do I pay a tax?
This is a brewing problem that the writers of the tax code didn’t think about when it was written, but it can be a looming problem that can end up being an expensive one. This potential problem spans the entire country – from Seattle to Baltimore, from San Francisco to Birmingham, AL, from Baltimore, MD to St. Louis and Denver, etc. Clearly, the tax-man will say that it’s likely that the employee will be taxed “where the work is conducted” irrespective of why they are working there, but don’t count on it. One could be subject to taxes in both places unless there is a written policy by the Employer stating where the work must be conducted. If there is such a policy, then the tax-man will be hard-pressed to assess taxes in other than the “mandatory” site. Relatedly, if the employee can keep time records of approximately where s/he is when working away from the Employer Site, that will surely be helpful.
Two Simple Recommendations for TeleCommuting Employees:
- Have a company policy of where/when the employee is supposed to be working;
- If the employee has permission to telecommute, make sure the employee keeps records of how long s/he is working from which location and have the employee report that to the Employer and keep a copy for his/her accountant.