How remote workers and their employers can avoid a tax nightmare

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If you thought 2020 was a messed-up tax year because of COVID-19, remote working and the wildly different laws from state to state, just wait till you get a load of what this year’s got in store. 

Factors ranging from the end of tax holidays to child tax credits to reciprocity rules between jurisdictions threaten to create mass confusion when it comes to employees’ personal income taxes and employers’ payroll taxes alike, as states get more aggressive about clawing back revenue they lost due to the pandemic.

While much has been written about COVID’s impact on tax obligations, experts acknowledge that confusion reigns. We had some tax specialists break down the most important questions that face employees and employers.

Here’s what you need to know. 

Employee vs. independent contractor 
Increasingly, the lines between employees and independent contractors, or freelancers, are becoming blurred, according to Kelly Erb, a tax lawyer and journalist who writes for Bloomberg and the blog TaxGirl.com. But there are ironclad differences between the two for tax purposes. “You are not self-employed just because you are working from home,” Erb said. 

Other than receiving a W-2 instead of a 1099 form at the end of the tax year, why does the distinction matter? Because the Tax Cuts and Jobs Act (aka, the Trump tax cuts) means that you cannot deduct home office expenses if you are an employee, Erb noted, adding, “There is no hardship exemption or coronavirus waiver.”

Not only can employees not write off their office space — they cannot claim work-related expenses like that new laptop, smartphone or their utility bills on their tax returns. That said, many employers have allowed this through the pandemic at their own discretion.

Level with the boss
If you decided to up and move to the beach for the duration of the pandemic, it is up to you to inform your employer. Employees need to provide their bosses with any documentation or information related to the dates of travel or a move out of state, according to Thomson Reuters content editor and tax expert Carlton Huntley.

A recent survey by the San Francisco-based talent mobility platform Topia, revealed that while 28% of employees have worked outside their home state or country during the pandemic, just one-third reported all those days to HR. “As a result, both parties are at risk of hefty penalties in the event of an audit,” said Nishant Mittal, svp and general manager of business travel at Topia.

Ernie Villany, founder and president of accounting firm Boulder Valley CPA in Colorado, added: “Under COVID, people are living in Airbnb’s, they’re living in campgrounds, living in Airstreams. They have to be measuring the days they spend in those communities and in those states because they could be creating a filing obligation that they are completely unaware of in more than one state.”

In 24 states, working for even one day in a state technically obligates a taxpayer to file a return in that state, said Jared Walczak, vp of state projects at the Tax Foundation, a tax policy nonprofit. “More importantly, as people have moved around, even temporarily, during the pandemic, they may have worked enough in multiple states to have tax obligations in multiple states,” he said. 

Know the law
Thomson Reuters’ Huntley advises employees to check the tax policies of the states where they deliver their work — and those they reside in — to see whether they have any specific provisions enacted around those working remotely due to COVID-19 protocols.

As Nicole DeRosa, senior tax manager at the New Jersey-based accounting firm Wiss, notes, many states, due to the significant rise in remote work, have issued temporary guidance with respect to employer withholding (tax deduction) requirements. However, many are ending their temporary guidance and reverting back to pre-pandemic rules, which could impact an individual’s tax situation. 

For example, New York imposes a “convenience of employer” rule, which subjects employees to income taxes in the employer’s state, even if the employee is working out of state. “In an effort to recoup lost revenue, New York is specifically targeting individuals who are claiming less income allocated to New York compared to prior years,” said DeRosa. 

Again, the burden of responsibility falls squarely on the employee.

Lynn Gandhi, partner in the Milwaukee law firm Foley and Lardner said that remote workers need to be aware of each state’s requirements and whether they’re considered a non-resident deemed to be earning income in that state. “[A remote worker] cannot rely on their employer to have properly withheld all required taxes — it’s the individual, the remote worker themselves, who will be liable for any taxes due,” she added.

3 Questions with Bjorn Reynolds, founder and CEO, SafeGuard Global

Remote working is here to stay, but businesses have taken different views on whether to reduce salaries based on location. What’s your view?
We [as a company] want to have the best talent anywhere in the world, period. So when you find the best talent, to then say because you’ve moved I’m going to take your salary down, isn’t the right way to think about. Of course, a lot of people [employers] may have stopped employing in the U.S., and moved their operations to another country, because they can lower their salary bills. But it’s gone too far now, especially with remote access. We believe in trying to normalize salaries — it doesn’t matter to me which country you’re from, it matters to me what you can do. And it matters to me that you’re able to be here for a long time happy, content, excited.

How should individuals who want to work remotely negotiate on salaries?
If you’re really good at what you do, I’d look at where these companies come from, where they’re hiring from and tell them what your expectations are right now. Be clear — it’s a very pro-worker market right now. So ask what’s the best environment and package that I can get as a remote employee? What benefits can you give me? What vacation days, what sort of supplemental benefits do they provide and then of course the salary. But it’s important to focus on that whole package. And the second big thing to look at will be what the culture is of the company: How do they do manage remote employees? Because I don’t want to become someone forgotten —left out, here and there, as a remote employee.

What advice would you give people who want to work remotely for a company that’s overseas, for the first time?
Often when businesses want to employ people abroad, they don’t have an entity [in that country]. So they ask you to be an independent contractor, and they will pay you as a contractor. So they’re almost trying to force your employment categorization. That’s a big no and something I would question, because say if you’re in the U.K. and your’e caught doing something wrong [by HM Revenue and Customs] you’re who gets punished. They [the company] has never been in the U.K. So a big watch out sign is on that — don’t be fooled by that. We see a lot of companies trying to circumvent government rules. There’s been a huge paradigm shift that the employee is now the one in charge.

By the numbers

  • 40% of 4,924 employees polled globally, said they plan to leave their job in the next three to six months and 64% of those considering leaving said they would do so without another job in hand.
    [Source of data: McKinsey ‘Great Attrition or Great Attraction’ report.]
  • 75% of professionals say it’s important their employer requires all employees to be vaccinated before returning to the workplace, with 27% saying they will not return to the workplace without this requirement.
    [Source of data: LinkedIn.]
  • While working from home, 50% of 1,002 U.S. adults talked themselves out of using a sick day and 33% because they believed their supervisor would be suspicious of their reasons for doing do.
    [Source of data: Skynova survey.]

What else we’ve covered

  • While some employers may regard employees having a side hustle as an unwelcome distraction, others are actively encouraging their staff to pursue them. 
  • Bosses everywhere are anxious to dial up the fun by booking in company retreats, so that colleagues can reconnect in person after so long apart. And some have extra dollars to burn.
  • “I’m not comfortable”: The uncertainty around delated office reopenings has left at least one tech startup marketing strategist feeling anxious after finding remote work to be more productive and, as a woman of color, less daunting than in-office work. 

This email briefing is edited by Jessica Davies, managing editor, Future of Work.

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