Working from home some or all of the time has become commonplace and seems likely to continue regardless of what happens with the COVID-19 pandemic. New ways of working require new ways of handling tax withholding. Employers may need to withhold at multiple locations for some employees. Employers should consider implementing internal policies to blunt future tax audits. Employers will also need to find new ways to communicate about tax issues with employees no longer working full time in the office.
Back in 2020, the assumption was that work-from-home would be short-lived. Consequently, some, but not all, taxing authorities permitted employers to continue to withhold tax exclusively at the workplace location even for employees working remotely in another jurisdiction. These temporary safe harbors for withholding have been, or shortly will be, terminated. As a result, employers are at risk if they do not withhold taxes for the taxing localities in which their employees actually work.
Little reason exists to expect the federal government, states or localities to provide much guidance in the near future. Putting thoughtful withholding policies in place now will aid in responding to future audits by taxing authorities for underpaid withholdings. The policy could also be useful in responding to employee inquiries about tax withholding and preventing misunderstandings that could affect employee morale and retention. Any policy should also consider how data about where employees work will be collected.
As we approach the end of 2021, the time is right to address withholding questions. Please feel free to contact a member of BakerHostetler’s State and Local Tax team if you have any questions.
Authorship credit: Edward J. Bernert, Matt Hunsaker, Christopher J. Swift, Michael J. Semes and David D. Ebersole