COVID-19 and Telecommuting Tax Implications for Business Owners

COVID-19 changed the way we do business. The pandemic catalyzed remote work and telecommuting. As a result, many companies shifted toward a more permanent mobile workforce. While employees relish the change, the telecommuting tax implications for business owners create an ambiguous landscape. To that end, Edgewater CPA Group hopes to provide a high-level understanding for local business owners in Fishers, Indianapolis, and the surrounding area.

Non-Resident Employees

COVID-19  squashed many businesses in various industries. Along with companies, states carried the burden of reduced tax revenues from income taxes. As remote work proliferates, employees are better positioned to work in a state outside of their employer’s physical location. This leaves states clamoring to update regulations and guidance at the nexus of income taxes and business tax policies.

For instance, many people question whether states can legally pursue income taxes from non-residents whose employers exist within their state jurisdiction. Since states may offer conflicting rules, they may inadvertently tax income twice.   

Creating Nexus

A company’s physical presence and economic presence can both create nexus. Sales, payroll, and revenue can all produce economic nexus. Depending on the volume and value of transactions, companies with as few as one employee in a location can create nexus, which leaves the company obligated to file for income tax withholdings as an out-of-state company. Companies with employees who only recently began working in a state outside the office’s headquarters can create telecommuting tax implications for business owners. Indiana issued temporary guidance asserting that employers didn’t enact nexus if employees worked out of state due to COVID-19. However, that interim guidance expired on June 30th, 2021, for more employees. 

Telecommuting and Sales Tax

Most businesses know they must collect sales tax for products sold in other states that surpass that state’s threshold. However, they may not be aware that their employee’s physical presence in and of itself may also produce nexus even though they telecommute. In some scenarios, the employee’s physical presence may supersede the volume of sales (the economic factor). Thus, employers must track the components that create economic nexus in addition to any telecommuting employees residing out-of-state. 

Telecommuting and Income Tax

In addition to sales tax, employers must remain aware of income tax obligations. Some states already determine they will only apply income tax withholding for the employer’s state, but others will opt for determining the employee’s physical presence. If an employee lives and works remotely in one state, their employer operates in a different state, and the two states don’t have reciprocity, they may experience tax implications. In the latter scenario, they risk double taxation. 

Insights

Business owners who use CPA professionals to help them navigate bookkeeping, tax strategy, and tax preparation have more confidence than those who attempt to navigate independently. If your business increases its remote workforce and those workers telecommute out-of-state, we encourage you to contact us. We can provide a free consultation and determine the next best steps for your business. Call (888) 317-4835 to schedule an appointment.