“Where do you work?”—once a question heard a dozen times at a networking event or even at a happy hour bar. Now, this question is two-fold, often followed by “Are you remote or back in the office?” The workplace—and the workforce—have changed greatly over the past year and a half. Everyone from multinational corporations such as BP and Deutsche Bank, to smaller innovators such as Spotify, and tech businesses such as Salesforce and Microsoft have announced new policies allowing permanent work-from-home or hybrid arrangements.
A recent U.S. study, co-authored by Nicholas Bloom of Stanford University, surveyed 22,500 Americans about work-from-home preferences post-pandemic, finding that over 30% preferred to work five days a week at home. In order to remain competitive in the new landscape, employers are going to have to adapt the perks they offer employees. What is now called “alternate working arrangement,” will likely just become an average working arrangement even after the pandemic. But what does this mean for corporations—what new tax challenges will surface?
Human resources and global mobility managers have been at the frontline of the new workplace since the beginning of the pandemic—and they will continue to be vital in carrying out these functions successfully. Many are seeing an overwhelming volume of requests to change working hours or location—often outside the state, or even abroad. New HR solutions are required to meet the administrative challenge and mitigate a new range of tax, audit, and immigration risks.
When an employee requests a change to their workplace for a long or indefinite period of time, many compliance facets of the position must be considered. The duration of these changes in location or nature of work in the employee’s new location might mean they change payroll tax, social security tax, or corporate tax reporting and costs. Weighing the risks and costs is a complex process.
For instance, if the employer has an entity in the new location, they have to determine if they’re willing to use it to support the employee. Taking into account corporate tax implications, employment law, and finance cross-charging reasons, the implications are far-reaching. The local entity may not want to add the headcount, however theoretical it is, or may not want the administrative tasks that are involved with managing the employee. There may also be confidentiality reasons when adding an employee to a local entity—when, for example, they get paid more than the locals based on their previous cost-of-living.
Another consideration arises if an employer doesn’t have an entity in the employee’s location.
This can be even more complicated because they might need to set one up for reporting, to comply with local employment laws, mitigate tax exposure, or simply pay payroll taxes. It’s a lot of admin for perhaps one employee in a location the employer would never have expected to create an entity and likely has no local knowledge.
From 14 to 23 million Americans are planning to move as a result of remote work, a recent study found. No matter the implications, the future for any successful business involves being able to adapt to these needs. These three steps can help alleviate the pain points:
- Get a process. Don’t let employees simply wander off to a new location and not tell anyone, and don’t let managers agree to these arrangements privately. By finding ways to encourage transparency and allow these type of arrangements, long-term problems like permanent establishment (PE) exposure, can be avoided.
- Automate the process. Software can be used to vet employee requests, rate them for risk: payroll, corporate tax, social security tax, employer legal (e.g., contracts, maternity, paternity, vacation etc.), safety and security risks, medical cover limits, and immigration. Technology platforms can help organize and analyze the cases quickly. By automating the process and making it available online, employees and managers have a record of what was agreed upon.
- Keep your employees in mind. An automated process will drive positive answers to many cases quickly. But in the cases that it doesn’t, be up-front and open to your employees needs. After all, running a successful business involves successful people being a part of it.
Where there are implications, it is better to know and plan in advance. This might just be telling the employee that they will have additional income and social security tax costs and they need to pay them. While we’re still at the beginning of the larger shift to the remote workplace, 15 states have said they won’t double-tax employees who are being taxed in their employer’s state, according to the American Institute of CPAs.
A move may also mean the employer gets a certificate of coverage to continue to pay social security tax in the employment location and avoid the employer social security tax costs, in the destination. Where there are more serious PE implications, employees can be advised on what they cannot do in the new location, or job descriptions and roles can be clarified to mitigate risk. Adapting to flexible working arrangements—that also meet compliance and tax regulations—give businesses peace of mind and keep them competitive in the job market—even expanding to where that market is.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Oliver Trundley is president of Equus Software. Equus offers global workforce management solutions that support mobility, talent and HR managers, as well as employees who are on assignment, travel frequently, or are being relocated.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.