As if the pandemic didn’t throw enough challenges at corporate talent mobility managers, they now have to focus on the various tax responsibilities incurred by mobile employees working in remote and hybrid situations. In this post, I’ll break down the things they’ll need to know and also provide direction regarding “hibernated” moves.
Now brace yourselves as we dive into the fascinating world of relocation tax!
Remote Work Arrangements
Remote work and work-anywhere arrangements can wreak havoc on payroll taxes. As a result of COVID-related office closures and companies’ lack of structured remote work policies, many “stealth” employees are working remotely from somewhere other than their residence location without informing their employers.
Employees that live and work in a jurisdiction that is different than where their company is located can trigger withholding obligations. Although some states may show leniency with tax reporting and withholding for workers who are working from home because of COVID-related restrictions, others may not. Illinois, for example, has indicated that non-resident employers may need to register and withhold Illinois income tax for an individual that has performed work for more than 30 days in the state, and some states have a single-day-of-work trigger for withholding.
The first step in assessing your potential exposure is to understand from where your employees are working. Employees should be alerted that it is their responsibility to advise HR/Payroll of a change in residence (temporary or permanent work location).
Hybrid Work Arrangements
Remote and hybrid work arrangements are expected to continue, even as vaccines are distributed and businesses reopen. Hybrid employees working remotely, and in the office and/or traveling to various states and countries, require close tracking in order to meet employer compliance obligations.
Because hybrid employees work from multiple locations, they require the same up-front work as remote employees. Similar to the remote employee, it’s important to ensure you have a tax presence in all the different locations where you anticipate they will work. The fluid nature of work arrangements will require a continuous process of tracking to ensure compliance. It’s important to reiterate that employees are obligated to inform payroll of their work location and changes that could impact their withholding.
Expenses are also an important consideration for hybrid employees. It’s necessary to determine what expenses employers are reimbursing and if they are allowable business expenses or relate to commuting, which would likely be considered compensation.
If you had employees who were initiated to move, but whose moves have been hibernated, then ask employees to certify their work location. Even though considered on-hold, employees who may have been initiated in 2020 but have not actually moved until 2021 or later may still require tax gross-up in both years, especially if expenses were reimbursed or advances issued and not fully reconciled.
And don’t forget to reduce tax gross up expenses by accurately tagging and reporting COVID-19″ disaster payments for expenses incurred due to necessary support and or accommodations made for mid-move employees such as extended temporary living. “Qualified disaster” payments are tax-free under Internal Revenue Code Section 139. Through December 2020, Weichert tracked over $4M in excludable disaster relief payments on behalf of our clients.
Furthermore, many businesses that have been severely impacted by coronavirus (COVID-19) may actually qualify for two new employer tax credits – the Credit for Sick and Family Leave, which allows employers to claim credits for some of the mandatory payments to employees for paid sick leave, personal leave to care for someone else, and care for children due to the closure of their school or daycare; and the Employee Retention Credit, which allows employers with businesses partially or fully suspended due to government COVID-19 closure orders to claim certain amounts against wages and other expenses paid to employees during the period between March 12, 2020 and January 1, 2021.
These credits are more fully described on the IRS website here. As with any significant tax issue, always consult your corporate tax advisor for information on reporting and compliance requirements.