Employers seeking to emerge from the pandemic with a more adaptive and resilient workforce model may face a broad range of legal issues. Nixon Peabody’s director of global strategies David Kaufman and partner and tax attorney Patrick “Rick” Cox discuss some of the tax issues employers may face in a post-COVID-19 workforce, such as tax withholding for a remote workforce.
This transcript has been edited for length and clarity.
David Kaufman: One thing we’ve noticed during the pandemic was that a lot of folks have been moving all around the country. You may have an office in New York, Chicago, or San Francisco and find out that your employees are now working from Utah, Georgia, Florida, or Pennsylvania. I think companies are trying to figure out what it means for their taxes if they now have a remote workforce.
Rick Cox: It’s a very important question to ask, and it’s something I deal with every day. I think it’s important to think of it from both the company’s standpoint and from the employee’s standpoint. From a company’s perspective, they’re taxed based on where they operate, and that can be dependent upon where their employees are located. To the extent that their workforce is now spread out because of COVID-19 into different, remote jurisdictions, they need to be worried about, as a company, how their corporate income tax liability may increase because of the presence of their employees and their workforce in different states. And then from an individual’s standpoint, the individual worker is taxed based on where they live, their residence, but also based on where they work, and so to the extent they are commuting to a different state, they could be subjecting themselves to taxation in that other state as well. And that was a pre-COVID-19 rule, that’s always been the rule.
But now, COVID-19 has heightened the situation to the point where you’re seeing situations where states are saying, “Well if you work and commuted to Massachusetts before COVID-19, and it’s just because of COVID-19 that you’re not coming into Massachusetts anymore, we’re going to deem you to be coming into Massachusetts and still tax you.” And New Hampshire, for example, has filed a case in the Supreme Court against Massachusetts on this very issue. But then you’ve got states in various different camps, some are following Massachusetts and some are following New Hampshire. And so, you, as an individual, are left to sort it all out and figure out where do I sit, where do I physically sit, and where am I digitally commuting to. And, that can be daunting.
David: What kind of impact will that have? Is it a significant impact, lots of money, or are we talking about just on the margins?
Rick: Yeah, so it can be extensive. It could be a material item for the company to the point where companies have relocated their headquarters and or opened up an office in a jurisdiction that is tax friendly and caused that to be a co-headquarters location that all their remote workers will report to. So they may be in a high tax jurisdiction with their regular headquarters, but they may open up a co-headquarters spot and have all their remote workers report to that office. And various derivations of those kinds of strategies are being done in order to manage the sort of nationwide taxation of that company. We’ve got fifty states and every state has a different tax regimen, some have very high taxes that are imposed on companies, and some states, like Wyoming and Nevada, don’t have any taxes at all. So you can really sort of arbitrage tax rates in this situation, as a company, to manage your tax efficiencies.
David: You say states are getting more aggressive. If I was an employer and I said, “I’m just going to put my head in the sand and I’m not going to worry about this and hope for the best,” will I still have some liability and problems ahead?
Rick: I think this really manifests itself in the nature of the taxes that relate to these nexus issues that we’re talking about. So the nexus issues are very important, and they show up on the bottom line, if you will, via your payroll withholding obligations and, in other instances, based on your sales tax nexus and where you need to collect sales tax.
Now, why do I say that those are important to the bottom line of the company? That is because I’m not talking about the actual bottom line of your tax return or the bottom line of your balance sheet, I’m talking about what people really care about and that is their personal liability and potential criminal liability for failure to comply with taxes. You can file most taxes in a return and get around it. Exceptions are trust fund taxes or taxes in which you have fiduciary obligation to withhold on behalf of a state, there is heightened scrutiny with respect to those taxes. If you just, as you say, blow them off and say, “Oh well, I don’t need to worry about it,” you could be under-withholding with respect to those employees.
David: What’s a good best practice if I’m an employer, I talk to my folks on Zoom, and I can’t tell if they’re in their office or at home? What do you think is a good strategy for me to get my arms around this?
Rick: Well, I think communication is always the best strategy, and when you attach a dollar sign to your communication, it always helps. What I would say is “hey, employee, there might be a chance that we’re over-withholding for you, if you have moved to a jurisdiction where the rate is lower, we may need to lower your withholding, you’ll get more cash in your pocket, and, more importantly, if you don’t tell us where you’re working from, you may end up having to file taxes in two different places. As an administrative burden, that is reason enough to let us know what the perfect information is." So communication to your workforce that says, “Hey, look, we’re all in this together, we want to report correctly, so we don’t have to report twice, and you get the benefit of potentially having a lower withholding tax.”