As we mentioned last week, the American workforce is evolving. Technology is allowing businesses to use alternative methods for hiring employees instead of relying entirely on in-house staff that require office space and resources. Many businesses were forced to shift to more telework due to the COVID-19 Pandemic. These changes bring inevitable questions, however, including the tax and other financial liabilities of hiring remote employees.
Your business is entitled to hire the way you see fit to fulfill roles within your company and meet your goals. It’s important to understand the ramifications of these choices. As your trusted business law partner, we want to shed light on various taxes related to a remote workforce.
Do I Need to Reimburse Remote Employees for Internet and Other Costs?
California Labor Code Section 2802 directly answers this question in the affirmative. An employer is responsible “all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties” and a portion of internet or other bills associated directly with remote work fall into this category.
This is a long-standing requirement under California law, and the recent decision in favor of the employee in Thai v. International Business Machines Corp. upheld these standards. In this case, the court ruled that expenses such as internet access, telephone services, a computer, accessories, and other work-related expenses because those expenses are inherent to the work being done by remote employees on behalf of the employer, even in their own homes.
The court adds that “Section 2802 is designed to prevent employers from passing their operating expenses on to their employees” and that even if an employer never directly asks an employee to purchase certain equipment or subscriptions they are still entitled to reimbursement if the work required those expenditures.
Tax Consequences for Businesses
Navigating the tax landscape for a remote workforce is as challenging as it is necessary. The complexity of tax liabilities escalates significantly when your employees are spread across state lines. Imagine a scenario where your business employs individuals in 10 different states. Each of these states has its own set of tax laws, which you must meticulously follow. This not only includes state income taxes but also local business taxes and other applicable taxes. Non-compliance with these guidelines can lead to substantial penalties, making diligent tax compliance and financial reporting more crucial than ever.
Conducting a thorough cost-benefit analysis of hiring remote workers is imperative for your business. This analysis should weigh the convenience of hiring a remote workforce against the complexities and potential costs of multi-state tax compliance. In this dynamic environment, having a legal partner, like Dahl Law Group, becomes invaluable. We are equipped to guide you through the labyrinth of varying tax laws across states, ensuring your business remains compliant while leveraging the advantages of a remote workforce.
The Risks of Double Taxation for Employees
A significant challenge faced by both employers and employees in the realm of remote work is the risk of double taxation. This occurs when employees are taxed in the state where they physically work, as well as the state where the business is headquartered. For example, if your business is based in California but employs remote workers in several other states, it is essential to accurately maintain records of where your employees are working. This includes ensuring that payroll taxes are correctly withheld based on the employee’s work location and understanding if any sourcing rules require you to charge employees taxes based on where the company is located, as well.
During the COVID-19 pandemic, some states implemented laws that require local taxation of employees who went from working in that state to telecommuting from other states to levy taxes based on the location of the employer rather than the employee. These efforts, understandably, faced resistance and added another layer of complexity to tax compliance for remote work arrangements. Navigating these murky waters requires careful attention and expertise to avoid the pitfalls of double taxation.
You Can’t Afford to Get This Wrong
The stakes are high when it comes to the cost-benefit analysis of employing a remote workforce. Employers must conduct thorough research and gain a deep understanding of the relevant tax and financial reporting laws. A misstep in this area can have significant financial and legal repercussions.
At Dahl Law Group, we have the experience and know-how to help clients navigate these complex decisions. By partnering with us, you ensure that your decisions are informed and your business is safeguarded. Contact our office for legal guidance and partnership in making the most strategic choices for your remote workforce hiring.
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