The top tax challenges facing remote workers today are complicated and vary depending on the location of your employees. They can include income taxes, gross receipts, sales, and local business taxes.
As remote working continues to grow, companies must rethink their hiring strategies, revamp policies on where and how work gets done, and adopt technology-enabled solutions. These complexities require proactive initiatives and a willingness to adapt and monitor developments and data.
Double Taxation
Double taxation, levying twice on the same income or earnings, is a major problem for businesses and individuals. It can be a significant burden, and it is prevalent when corporate profits are taxed at the corporation level and again when dividends are distributed to shareholders.
Fortunately, many states relieve this type of double taxation by offering credits for taxes paid to other states. However, state laws can limit these credits and may only partially offset the tax owed in both jurisdictions.
The risk of being taxed twice arises when you live and work in one state for convenience while your employer is based in another. A “convenience rule” can create a potentially high tax bill for remote workers.
It is important to note that the convenience rules only apply if your company has a permanent establishment in the state you live and work in. Instead, the state where your employer is headquartered will determine which state you owe income tax to.
Thankfully, there are ways to avoid being taxed twice, and plenty of advice is available online about this issue. If you’re an individual or a business concerned about being taxed twice, consider seeking specialist advice from a reputable lawyer with experience dealing with this issue.
Nexus
Remote workers working for an out-of-state business may create nexus for state income tax, sales tax, and withholding tax. The answer to this question varies from state to state. Still, generally speaking, an employee working remotely is considered a presence in the jurisdiction for these purposes, which makes the thing that remote work creates tax headaches for employers.
A nexus study performed by an experienced tax consultant can help you determine if your business is subject to nexus and, if so, its impact on your business. The process can be time-consuming and costly, but knowing where your business stands concerning nexus is essential to maintaining compliance.
Fortunately, a few states have relaxed their economic nexus requirements for out-of-state employers who use remote employees. These states include Alabama, the District of Columbia, Georgia, Indiana, Maryland, Massachusetts, Minnesota, and Mississippi.
Whether or not an out-of-state employer has nexus for a particular state tax is complicated and will often be determined by reviewing statutes, regulations, and administrative guidance. Moreover, state laws constantly evolve as they respond to new legal challenges.
As we continue to see more and more individuals and businesses working remotely, taxpayers need to understand the potential impact that pandemic-related remote work could have on their tax obligations. Congress can address this by providing relief for pandemic-related employees that will not impose new tax filing and payment obligations, the associated paperwork burdens, and the risk of audits.
Transfer Pricing
Transfer pricing is a practice used by multinational corporations to shift profits from countries with high tax rates into countries with lower or no taxes. This highly controversial and risky method has come under scrutiny from the IRS.
In everyday pricing situations, two independent companies negotiate the price for goods and services and eventually agree on a market value that reflects the correct cost and added value. However, a company with multiple divisions or subsidiaries in different locations may set a transfer price that diverges from the appropriate market values.
While this is not illegal, it entails an increased tax burden for the company utilizing transfer pricing and can create negative publicity for the organization. The Organisation for Economic Cooperation and Development (OECD) has spotlighted transfer pricing as part of its base erosion and profit shifting (BEPS) initiative.
Many tax authorities the world over have intensified their focus on this issue. As a result, companies are implementing streamlined data systems, centralized transfer pricing policies, and efficient documentation practices to maintain compliance.
Whether managing your transfer pricing process yourself or outsourcing to a third-party service provider, it is crucial to have the right tools and guidance. An end-to-end solution that effectively manages your transfer pricing policy, analyzes your data, and tracks evolving global regulations will help you avoid costly mistakes, time-consuming audits, unexpected tax adjustments, penalties, interest charges, and negative publicity.
Compliance
Compliance is the process of ensuring that your business and employees are following legal requirements, regulations, standards, and ethical practices. This is essential for companies, as it enables them to build customer trust and boosts employee retention.
It can also help protect your company from significant legal liabilities and fines. For example, failure to comply with financial regulations can result in hefty tax penalties and interest payments.
In addition, non-compliance can severely affect your company’s reputation and image. Violations of corporate governance, environmental protection, labor laws, and price fixing can all impact public perception, threatening your company’s bottom line.
However, compliance doesn’t have to be complicated or time-consuming. It can be a simple process that starts with defining compliance goals and establishing a plan.
For remote workers, compliance often includes determining the nexus in different states where they work. Depending on the state, nexus may create tax and social security liability for the remote worker or employer withholding obligations.
To determine nexus, you will want to identify where your remote employees spend their time, whether they are working in a home office or from a coworking space such as WeWork or Airbnb, and how much of that time is spent performing a primary economic activity (PE) in that country. This can be a complex task for remote employees who live in multiple states.
