Hello, and welcome to this edition of Mobility Via Podcast. I’m Scott Schapiro, a principal in the KPMG Employment Tax Practice and I’m here today with John Montgomery, my fellow partner in the practice. We work exclusively in the area of federal, state and local payroll taxation, and the current environment, that is people working almost anywhere but in their “regular” office, has created an incredible disruption in many aspects of life and tax. As everyone listening in here is likely aware, and maybe participating in, employees have been forced en masse to leave the comforts of their office and work from home, a parents house, a sibling’s house, anywhere but their office. At the outset, this might have seemed to be an unfortunate short-term result of COVID-19. But as the days have stretched to weeks, and the weeks have stretched to months, and for many far longer, questions have begun to grow with respect to how work from home employees should be treated with respect to the taxation of their compensation. And, ultimately, it is up to their employers to get it right…as best as they can.
For the last few months, a lot of organizations have been in reaction mode – a main focus has been accounting for all their employees, making sure they were safe and that there was as much work continuity as possible. There’s been lots of conversations on COVID-19 that talk about 4 phases: Reaction, Resilience, Recovery, and then ultimately, the new Reality. Certainly, many organizations are still in in the reaction phase, but now the conversation has progressed somewhat.
John, what do you see as some of the considerations that organizations are working through now in terms of payroll taxation?
Thanks Scott. As organizations adapt to a work from home model, there have been numerous issues for them to consider which have included:
- In the current environment, how long may the work from home model last, and in a future state does work from home continue either full time or in a hybrid approach. Determining the length of at home work in the current environment has been a struggle as states are opening at different times and often an organizations offices are not reopening on that timeline and in the future, the openings will be gradual;
- Review of current state laws, temporary COVID-19 regulations, and new legislation for how to properly source wages and withhold taxes for employees working in new locations. Many organizations are trying to determine if previous telecommuting regulations and convenience of the employer tests in a few states are applicable in the current environment, how long do the temporary COVID-19 regulations remain in place, and do organizations need to make changes to employee work locations and should they do that now, in the near future, or wait until further guidance is issued from taxing authorities and;
- How do these changes affect our employees and what information and communications should we be providing to them and do we want to issue a corporate policy for all employees, or make changes as requested by employees?
Also John– KPMG has hosted numerous Tax Watch calls and Share Forums across the country over the past several weeks. Are there any key themes or takeaways emerging from those sessions?
In our discussions with organizations, there have been a number of recurring questions and themes. Some examples include:
- Are states issuing legislation to provide guidance to employers on the tax considerations of having a work from home workforce? For the most part the answer is, not yet. Although many states have provided temporary regulations related to this topic, we are still in a wait and see mode for any new tax regulations.
The second key theme is:
- We have employees that have temporarily relocated to a country or a state that is different than their normal state of residence and do we need to determine where they are performing services? Organizations are reviewing their current processes and procedures for tracking employee locations or for those that do not, what can be implemented to know where the employees are currently providing services.
- How do I update an employee’s information in our payroll system and work with our payroll provider to effectuate these changes? As an example, I have many clients that have asked us about employees who previously lived and worked in New York, which has a convenience of the employer test for wage sourcing and withholding on employees that reside in another state and work from home, but have now temporarily moved to Florida during COVID-19 and the company isn’t registered to do business in Florida or report payroll.
Thanks John…these items seem to be fairly payroll centric, meaning focused on the state employment tax aspects of the issue. What about non payroll tax concerns?
Scott, there are certainly a number of non-payroll related issues organizations need to consider as employees now work in different countries and states. Many of our clients are reviewing a number of these issues such as:
- Do I have PE issues and corporate nexus in various new countries and states where we have never engaged in business before as a result of having employees performing services from a home location. The answers to this need to be reviewed on a country by country and state by state business. As we mentioned before, there are numerous temporary COVID-19 regulations around corporate nexus that should be reviewed along with pre-COVID-19 regulations that may still affect the determination on this topic.
- Do I need to register in these additional taxing jurisdictions for a multitude of tax types including corporate tax, sales tax, property tax, in addition to the payroll considerations, and;
- What kind of systems do I have in place or do I need to consider establishing to know where my employees are so that I can review all of the potential non-payroll tax considerations in that jurisdiction?
John, it sounds like there are a number of barriers to compliance and decision making here, some for organizations internally and some based upon tax authority positions which have been expressed. Based upon the organizational limitations as well these components, what are some of the “next stop” e options for organizations to consider?
The next steps on the future state are really about planning for different scenarios. Many organizations are tracking and reviewing current guidance and watching for legislative initiatives as to what any new tax regulations may look like. However, while waiting for more guidance, organizations are planning for and reviewing the implications on scenarios of leaving their Pre-COVID-19 tax footprint intact without any changes or based upon what we know about employee locations right now, if we do expand our tax footprint to all of these taxing jurisdictions where employees are located, how does that change our compliance requirements, and what systems and processes do we need to implement to be ready for this change.
Obviously tax is not the only consideration here. The review and approach is really bringing together many different groups within an organization that are also looking at when offices will reopen, how and at what capacity they reopen, and will some employees come back to the office full time, on a flex schedule, or potentially not come back to the office at all.
Organizations are also making sure to keep employees up to date on new or potential changes to taxation and responding to employee questions about taxation changes based upon where they are currently providing services.
John, thanks for joining me today to discuss these issues. If we go back to the beginning of March, I don’t think we could have imagined that the last two months would have turned out the way they did and it’s really a big question mark as to how the next couple of months will play out. But, I do think organizations, while still reacting, are in or entering the resilience phase and starting to look at some of the longer term aspects of what this means. If I think back to some discussions of the past year or two, there was some focus around allowing a workforce to choose where they work – from home, from alternative locations and just what does that mean from an organizational perspective and the legal and tax obligations that follow. And look where we are now – fast-tracked and forced into it, and companies are figuring it out. Yes, hopefully much of this is a temporary state, but we don’t know how long that “temporary” may be and we are entering a new reality.
So with that last thought, I’d like to close this session of Mobility via Podcast by thanking our audience for joining us again today. You’ll find links to our COVID-19 information page in the online description of this recording. In Future episodes, we’ll continue to address the top-of –mind issues of interest to our listeners. In the meantime, we’d love to hear from you. If you have thoughts on today’s episode or ideas for future episodes, please send us an email at USfirstname.lastname@example.org. One final thanks to our audience for listening in.