By Over the last year, the COVID-19 pandemic resulted in a number of changes for employers, from navigating the PPP loan process to implementing new sick and family leave policies. One major change has been a massive experiment in telecommuting, with the number of American workers working at least part-time from home more than doubling. According to a recent Gallup poll,[1] over 50% of U.S. workers continue to report they are working remotely all or part of the time. Moreover, of those working remote at least part of the time, approximately 44% reported they would prefer to stay remote even after COVID-19 is no longer a threat. This interest in ongoing remote work possibilities is consistent with an earlier Pew Research Center survey, which found that among employed adults who say the responsibilities of their job can mostly be done from home, 54% would like to continue working from home after the coronavirus outbreak ends.[2]
Jessica N. Cory
Given employee interest in continuing to telework, it is important for employers interested in offering remote work as a benefit to evaluate their policies now. One important employer-side piece of a teleworking policy is potential tax exposure. During the pandemic, many jurisdictions enacted policies, whether formally or through informal guidance, to prevent employers from becoming entangled in additional tax obligations as a result of employees temporarily teleworking away from an employer’s physical office as a result of COVID-19 restrictions. Moving forward, however, many of these temporary reprieves have or will soon expire. U.S. employers should thus carefully consider the tax implications of allowing an employee to work in other jurisdictions, whether in another state where the employer does not otherwise have a taxable presence or even internationally.
From a tax perspective, what should be considered in determining whether to allow employees to work remotely across state lines?
If an employee wants to work remotely from another state, where an employer does not currently conduct business, an employer must carefully consider the potential tax consequences for both the employee and the employer. For example, when it comes to the employee, there may be an impact on the employee’s take home pay if more than one state requires income tax withholding from the employee’s check. This could arise in multiple situations, such as where an employee works part-time in the employer’s office in State A and part-time from home in State B, or where the employer’s home state has adopted a “convenience of the employer” test, which imposes income tax on remote-out-of-state employees where the employee is working for an office based in that state.[3]
From the employer’s perspective, permitting remote work across state lines may result in more than simply increased payroll tax compliance costs, from the withholding obligations that must be met in new states. For instance, in each case, an employer must also consider whether merely having an employee teleworking from a particular state obligates the employer to register to do business in that state or even potentially creates sufficient economic nexus for a corporate income or business franchise type tax to apply to some portion of the employer’s income.
Do similar considerations apply to an employee working remotely in an international jurisdiction?
International teleworking, similar to working across state lines, will involve a jurisdiction-specific tax analysis. However, an international remote work situation can be even more complicated, requiring an employer to look at multiple levels of authority, from tax treaties to the foreign country’s domestic laws. Accordingly, employer policy should allow for a case-by-case evaluation of any proposed international remote work and make clear that the employee will be responsible for bearing the economic burden to the extent the company is required to withhold and remit foreign income taxes on his or her wages, or foreign social security type payments.
In considering a proposed international teleworking situation, there are two primary tax issues with which a company needs to concern itself:
- Whether the employee’s presence in the foreign country creates an economic nexus between the company and the foreign country, sufficient for the foreign country to tax all or part of the company’s income
- Whether the company be required to withhold and remit foreign income tax from the employee’s wages
To answer these questions, the first source of relevant authority would be a bilateral tax treaty between the United States and the foreign country, if any. To the extent such a treaty exists, it should provide guidance on both of these issues. Otherwise, the answer will be found in the foreign country’s tax laws.
For example, under the Model Income Tax Treaty published by the Organization for Economic Cooperation and Development (OECD),[4] upon which many tax treaties are based, a company will be subject to tax in the foreign treaty-party country only if the employee’s presence in the country creates a “permanent establishment,” or “PE,” in that country. For purposes of the Model Income Tax Treaty, a PE is defined as a “fixed place of business.” Commentary to the treaty indicates that an employer’s home office can office can create a PE for the company, but whether it does so will be a facts and circumstances-based analysis. Individual tax treaties and the domestic law of foreign countries may provide for harsher or more lenient treatment.
One factor that may prove particularly relevant is the duration of the proposed international remote work assignment. For example, the analysis would be very different for an employee who wants to telework in a treaty country for several weeks while on vacation versus an employee that wants to relocate to a treaty country for months at a time. In the latter case, an analysis would also need to be made of the nature of the employee’s work, such as whether the employee has contracting or other decision-making authority on behalf of the company, leading to a stronger case being made for the company conducting business through the employee’s “home office.”
A tax treaty, where applicable, should also provide guidance on the second question, with respect to whether the teleworking employee will be subject to tax while in the foreign country, and thus whether an employer will have an obligation to withhold and remit foreign income taxes for that employee. Under many income tax treaties, including the Model Income Tax Treaty, an individual working in a treaty-party country will only become subject to tax in that country if he or she remains for more than 183 days. Accordingly, employer policy could allow shorter stints abroad in a treaty country, but not stays over a set amount of days (for example, 160, to create a buffer before hitting the 183 day threshold). By contrast, in a non-treaty jurisdiction, an employer could face a withholding obligation from day one.
For employers looking to offer remote work as an ongoing benefit, the potential tax pitfalls described above should be viewed as important considerations, not a barrier to teleworking. With proper planning and the adoption of well-though company policies, an employer may be well-placed to offer either domestic or international remote work as a benefit to its employees, potentially improving employee retention and productivity and providing the employer with a broader pool of employee candidates. A qualified tax attorney can assist in providing the necessary guidance to employers looking to craft a remote work policy that would allow employees to work out of the employer’s home state.
Jessica N. Cory represents businesses and individuals in a wide range of transactional matters, with an emphasis on tax planning.
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[1] L. Saad & A. Hickman, Majority of U.S. Workers Continue to Punch In Virtually, Gallup (Feb. 12, 2021), https://news.gallup.com/poll/329501/majority-workers-continue-punch-virtually.aspx.
[2] K. Parker, J. Menasce Horowitz, & R. Minkin, How the Coronavirus Outbreak Has – and Hasn’t – Changed the Way Americans Work, Pew Research Center (Dec. 9, 2020), https://www.pewresearch.org/social-trends/2020/12/09/how-the-coronavirus-outbreak-has-and-hasnt-changed-the-way-americans-work/.
[3] See, e.g., Arkansas Dep’t of Finance and Admin., Legal Opinion No. 20200203, imposing Arkansas income tax on a computer programmer working remotely for an Arkansas-based employer from Washington state (“Akransas Code Annotated § 26-51-202 levies the Arkansas income tax on the income received by a nonresident from an occupation carried on within Arkansas. Your client is carrying on an occupation in the state of Arkansas, albeit from an out-of-state location. Although your client performs her work duties in Washington state, those activities impact computer systems and computer users in Arkansas … Those activities constitute the conduct of an occupation in this state.”
[4] OECD, Model Tax Convention on Income and on Capital 2017 (Full Version) (Apr. 25, 2019), https://www.oecd.org/ctp/model-tax-convention-on-income-and-on-capital-full-version-9a5b369e-en.htm.