Quick Look: There are more remote employees than ever – and with that trend comes the potential for many tax implications. Here’s what makes this year’s tax season different from all the rest, as well as key considerations brokers and small- and medium-sized businesses (SMBs) must keep in mind to avoid non-compliance and additional costs.
Every tax season is notorious for its intricate challenges, but with the recent rise in remote work and ongoing complexities stemming from the COVID-19 pandemic, this year’s tax returns are proving to be even more complicated. To maintain compliance and avoid costly fees, brokers and SMBs can work with a professional employer organization (PEO) and keep a few key things in mind.
What makes this tax season different?
The tax season in 2022 differs from the ones before it – mainly due to the sharp, recent rise in remote work. According to Owl Labs, nearly 70% of full-time workers worked remotely during the year and 84% of those who changed jobs or are actively seeking new jobs are doing so to obtain more flexibility in where they work.
Remote work certainly has its benefits – it’s been linked to higher productivity, retention, profitability, and more – but it also comes with a host of potential tax-related consequences. When companies have remote workers, they face the potential of needing to register and file taxes in multiple states, and budgeting for the various states’ unemployment, income tax, and state withholdings. It’s not surprising that these situations can easily become complicated, especially if a business doesn’t have a PEO to rely on.
Which state employees reside in matters – a lot. When workers live and work in a different state than the business, it can create costly tax implications. For example, companies may be required to pay into the employee’s home state’s Family and Medical Leave Act (FMLA), and must understand and comply with each state’s HR regulations including frequency of pay, sick pay, paystub requirements, and more. Additionally, if SMBs don’t have PEO tax experts to refer to, they likely need to consult with CPAs, other tax professionals, or lawyers, which of course creates an additional cost.
Now that we’ve covered what makes this year’s tax season unique, let’s explore how brokers and SMBs can navigate it.
Know which laws apply
The tax laws that surround remote work aren’t cut and dry. When the pandemic began and employees shifted to working from home, many states issued guidelines regarding employers’ tax obligations. One-third of states offered temporary suspension of corporate income taxes, which was helpful in the short term, but many of these policies may be ending soon and original tax laws will resume.
Other laws vary by state, too, including daily overtime, enforceability of noncompete agreements, paid time-off (PTO) carryover, post-separation payments, family leave rights, 1099 misclassification, unemployment compensation, Workers’ Compensation, licensure requirements, and more.
The first step to tax compliance is understanding which laws apply to you or your clients – and the payroll and tax experts at your PEO company can provide this valuable information.
Income tax implications
In terms of remote work, there are many potential consequences associated with income tax.
Each state has different tax requirements when it comes to where you work versus where you reside, and where income taxes must be held and paid to. This can complicate personal income taxes, as well as make it confusing for employers to understand where they’re obligated to withhold.
To successfully navigate this, businesses must keep their records up to date, and employees must be transparent and proactive about informing their employer about any changes to their home address.
Income tax situations can be complicated, and it can be very easy to make mistakes. However, the right PEO partner can help you succeed by maintaining these records, ensuring the correct taxes are being applied, and assisting businesses in making educated decisions.
Whether you’re a broker assisting clients or an SMB navigating its own taxes, here are several key tips to keep in mind.
- Keep employee records up to date. Tax rules vary by state, and a business may face liability if a remote employee moves to a different one. It’s critical to keep employee records updated, and to review each employee’s payroll setup, paying particular attention to their work location.
- Consider potential situations. Today’s workplaces are incredibly fluid, and it’s important for SMBs to review potential work location scenarios and suggestions for handling each from a payroll and tax perspective. For example, do remote employees in a particular state create a new tax area (aka a “nexus”) for the employer?
- Keep the total cost of hiring employees in mind. As businesses consider hiring new personnel, it’s important to keep the total cost of hiring someone in mind. Depending on where the employee resides, sometimes employers may owe additional taxes, which can of course affect how and where they source job candidates. It’s also important to note that some regions’ tax and employment laws – like frequency of pay, PTO, and paid family leave – may be too risky for SMBs to take on when hiring remotely. SMBs should consult with their PEO’s compliance experts to assist in this decision-making process.
- Reassess contract employees. In addition to full-time employees, businesses should ensure they regularly reassess their contract and 1099 workers to be sure they are adhering to all applicable rules.
Make tax season less taxing with a PEO partner
The local and federal tax laws surrounding remote work are murky, and it’s unclear whether they will change to address the rise of employees working from home. As such, it’s more important than ever to rely on the tax professionals at your PEO to keep you up to date, and remember: when in doubt, reach out.
A PEO like ExtensisHR can provide payroll and tax administration services like:
- Tax filing (federal, state, and local) and W2 preparation
- Payroll tax liability management
- Dedicated payroll manager and payroll processing
- Tax credit support
- Employee records maintenance
- And more
Is it time for you to start navigating the complexities of this year’s tax season? The experts at ExtensisHR can help – contact them now.