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Flexible Workforce for the Future – Assessing the Benefits and Risks

As a result of the COVID-19 pandemic, and with the mandatory stay-at-home-orders enacted, companies had to create a remote working environment for many of their employees. Although some companies faced some initial obstacles such as technology issues, many of these issues were eventually resolved. The COVID-19 pandemic has shown that it is possible for people to work from anywhere and be productive doing more jobs than previously thought.

Throughout the past year, it has become increasingly clear that a significant portion of the workforce sees a benefit to working from home or any remote location. Such an arrangement goes by many names (remote working, working from anywhere, telecommuting, etc.), but the idea of not having to commute to an office has resonated with many employees. Employers are currently discussing the issue, developing policies and a framework for their employees to remain flexible and productive. The inherent risks, especially in terms of income and payroll tax compliance and reporting, cannot be ignored.

Tax Implications for Both the Employer and Employee

One of the most important aspects for a successful work from anywhere program is ensuring both the employer and employee are aware of their respective tax obligations. The migration to increased flexibility and adaptation of remote work has resulted in significant tax compliance issues for companies that need to be addressed.

  • State and Local Income Tax - If a company has employees working long-term in a state, it becomes likely that the company will be deemed to have a taxable presence in that state. States use a variety of factors to apportion income, including sales, payroll, property and tax rates and methods of assessing tax vary considerably between jurisdictions. Failure to register and pay taxes will often result in significant penalties and compliance costs, therefore, it is important employers know exactly where their employees are working.
  • Foreign Permanent Establishment Risk – When remote work locations extend across international borders, companies must consider international taxation issues. Permanent establishment is a tax concept that may be defined in a country's domestic tax laws or under a bilateral income tax treaty between the home and host country. Having an employee working in a foreign jurisdiction for an extended period could be sufficient to create a permanent establishment in that country, triggering a multitude of obligations for the employer, including local registration, payroll, Social Security and corporate income tax filings in the host country and in the U.S.
  • Payroll Taxes - Companies will need to withhold, remit and report taxes from an employee based on where they are living in a work from home environment. If the remote employee is working in a foreign country, the compliance burden will include foreign social security tax issues, tax equalization issues and often a shadow payroll will be required.
  • Tax Filings – Depending on a specific country/state's regulations, employees may need to file tax returns in multiple jurisdictions. In addition, if the employee is working in more than one location during the year for an extended period, they may be required to pay taxes twice on that income. However, there may be tax credits, including foreign tax credits or domestic state-to-state tax credits, to help offset double taxation, but employees will need assistance and guidance to navigate through these issues.

As companies around the world invest valuable resources to create flexible workforce solutions, proactively addressing the tax issues that arise at the company and employee level must be a top priority. For many companies this is a new challenge that will require the assistance of professionals with experience in navigating through complexities of multi-jurisdiction employment.

Global mobility professionals are uniquely qualified to help with designing and implementing the compliance and reporting aspects of today's remote working environment to mitigate risk and support both the company and its employees. To contact DHG's Global Mobility team please reach out to us.

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