The COVID-19 pandemic has shifted many employees to working from their home or in another remote environment away from their traditional offices.
These changes are becoming more permanent, in the form of remote employees as well as hybrid employees -- those working partly at the employer’s office location and partly from home.
These changes in how employees work have created additional complexity in determining where taxpayers have nexus for state and local tax compliance purposes, what their state registration requirements are or should be, and eventually, how that impacts the income, franchise and sales and use tax filing positions.
A key distinction in analyzing state tax considerations is determining where the employee’s tax home is located, time spent at that location, and business activity performed there.
Generally, if employees are hired with the expectation to be at the employer’s office regularly and they are provided a workspace (even if it’s a shared space), the tax home would be the employer’s office. These would be your in-office or hybrid employees.
If the employees are not expected to come into the office regularly but rather work out of their home, their tax home would be their personal residence. These would be your remote employees.
When determining the tax home, the IRS and states would consider time ordinarily spent by the taxpayer at each post (office and personal residence) and the degree of business activity performed at each post.
These classifications can impact not only where the employer is required to file tax returns for income, franchise, sales & use taxes, etc., but also what expenses employees may be eligible to claim reimbursement from their employer. This can also impact any number of other considerations related to unemployment compensation insurance, workers’ compensation insurance, etc.
Employers should closely monitor where they are hiring employees or where their employees are moving to ensure they are addressing all state and local tax implications. In Ohio, the local tax rules require filing where employees are working if they are working remotely, which could further expand the scope of tax filings and the tax compliance burden.
Please contact your Schneider Downs representative if you would like to discuss your current situation and how these situations may impact your tax compliance requirements and state and local tax exposure.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.