Nearly 40% of office workers are unaware that their remote workplaces can have tax implications, and only a third of workers say they have worked outside of their office every day, according to a new survey.
With the pandemic, there is a significant risk that unexpected tax burdens will blind employers.
Most office workers were working outside of the office during the pandemic, according to the survey published by Topia, a human resources software company. It found that 43% had worked completely remotely since March 2020, and another 21% said they had spent most of their time away from the office.
Prior to the global pandemic, relatively few employees spent enough time outside of their offices' responsibility to expose their businesses to additional payroll taxes, exams and unemployment insurance. But widespread office closings in the age of Covid-19 mean many more are far from their former home bases, putting businesses at risk of millions of dollars in huge unexpected tax burdens.
"The risk used to be so small that you could brush it under the rug, but that has changed completely," Nishant Mittal, senior vice president of business travel for Topia, told Bloomberg Tax. "Now it's way too much to brush under."
A single state exam prior to working the pandemic from home cost a Topia client company nearly $ 5 million, Mittal said. If every state started an audit now, it could cost the same company $ 25 million, he said.
Companies are generally responsible for withholding wage taxes on any salary an employee earns while working in a country. If they don't track their employees – and many don't – they won't know about their liability unless the employees themselves alert them to changes in location.
Topia operates a cloud-based platform for managing workforce worldwide. The results are based on a survey commissioned by 1,250 US and UK knowledge workers in global companies.
The Organization for Economic Co-operation and Development urged in January that countries not change their rules on corporate taxable presence just because employees have temporarily moved due to sperm lockdowns, and some have adopted that approach.
In the U.S., states differ in the thresholds they use to determine the link between employee tax and employees, and some have temporarily dropped the link for the pandemic. The danger, however, is illustrated by a November survey by Bloomberg Tax & Accounting that found that few teleworkers in 37 states can be corporation tax-linked.
There is now a single piece of mobile worker legislation in Congress that would address this issue, although similar bills have died quietly over the past decade.
"It would really be in decline if Congress imposed another rule on physical presence," said Darien Shanske, professor of tax law at the University of California-Davis. He alluded to the landmark 2018 U.S. Supreme Court ruling in the South Dakota v Wayfair case that allowed states to impose sales tax collection fees on remote retailers based on economic activity in lieu of the previously required physical presence in a state.
States are becoming aggressive
A dispute between New Hampshire and Massachusetts over taxes on teleworkers could end in the US Supreme Court, where judges have asked the Biden administration to weigh up. If so, the case could determine the fate of related tax laws in New York and elsewhere. Other states facing widespread budgetary constraints are watching the case closely and preparing to step up scrutiny by non-residents.
Before an employee works in a location outside of the state where their office is located, companies must register with the State Department of Justice, but even billions of dollars worth of companies are not registered in every state.
"The penalties for not registering are much less than the penalties for not paying taxes," said Tim Noonan, tax attorney at Hodgson Russ in New York City. "It varies from state to state, as does the requirements themselves, but it's less of a concern than the tax issue, which is getting more expensive and chaotic."