Managing Remote Workers’ Tax Risk Needs an Interstate Strategy

Complying with employment taxes across multiple jurisdictions remains a challenge for employers. The increase of hybrid and remote workers has swelled those challenges and risk exposure for payroll, human resource, and tax professionals.

Many employers with a local or regional employee workforce may not have the experience, technical expertise, or bandwidth to effectively manage a hybrid and remote workforce. Developing a proactive strategy avoids a reactive response.

Employers should create a compliance and risk management committee consisting of internal and external resources and advisers in human resources, accounting, payroll, finance, tax, and legal to understand and navigate a complex tax and non-tax regulatory environment where employees provide services or are expected to provide services.

Not doing so increase risks for noncompliance and reporting errors and can generate significant tax and non-tax exposure. Employers that fail to put controls in place to monitor where employees work can create unnecessary administrative burdens, additional tax and legal costs, and employee dissatisfaction.

If employees request remote work accommodations on a temporary or permanent basis, employers may find they have a rapidly expanding geographical footprint. This creates unintended consequences and exposure to new tax and regulatory authorities related to:

• Employment tax
• Payroll practices and procedures
• Wage, hour, and benefit requirements
• State and local registration and licensing requirements
• Record retention rules
• Creation of nexus or permanent establishment

Compliance failures and corrective measures related to these issues may place a significant drag on an employer’s operations and create unnecessary strain on economic resources. Employers should carefully consider developing a proactive approach to manage their hybrid and remote workforce.

Each state, local, or foreign jurisdiction will have their own provisions related to remote and hybrid workers with varying levels of expense and complexity. The level of resources and efforts to comply in multiple jurisdictions may depend on maintaining a balance of the tension between absolute need or desire to have workers within a specific jurisdiction.

For example, an employer located in the Midwest that is challenged with recruiting, hiring, and retaining information technology professionals may be more compelled to hire IT professionals in California or New York rather than remote employees who provide administrative support. Expanding the geographic area for hiring should increase the employee prospect population, and accordingly (or hopefully) the available skill sets.

This is where a committee can help. Each committee member should ask the relevant “what if” questions related to their specific discipline and map out potential compliance and exposure challenges.

For example, if a company hires an employee in California but is based in the Midwest, will legal exposure, tax liability, or administrative burden increase? Companies should ask themselves such questions, as well as whether it may need to become licensed as an entity or will employees need additional licensing.

The objective is for each committee member to ask and respond to “What if we hire in this jurisdiction from a legal, accounting, HR, payroll, and tax perspective?” The committee also should develop controls policies that are initiated before assessing employment needs, recruitment, and hiring of hybrid and remote workers.

Once compliance and exposure challenges are identified, the committee should weight the compliance and exposure challenges within the relevant jurisdictions. The weighting should consider current level of activity in the jurisdiction, such as valid registrations, nexus status, and if outside of the US, whether the employer has a permanent establishment.

The committee also should consider the additional costs and compliance complexity within the jurisdiction. With the weighted compliance and exposure challenges identified, the committee is better equipped to advise on the feasibility of employment within various jurisdictions.

Like other risk management functions, multi-jurisdictional employment should be managed with appropriate prudence and business care to minimize the administrative burden and noncompliance exposure. There may be strategic opportunities to maximize efficiency and minimize costs when employers coordinate their hybrid and remote workforce population.

In addition, employers should develop policies and procedures that can guide management and staff when making go or no-go decisions with recruiting, hiring, and retention of employees. Like so many payroll compliance requirements, employers should take a multidisciplinary approach to address hybrid and remote worker compliance.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Martin Rule is a CPA and senior manager at EY with more than 30 years of employment tax and payroll administration experience.

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