Tax considerations when WFH: How this can impact you

2020 saw businesses adapt and change in order to deal with the Covid-19 pandemic. It saw thousands of people around the world pack up their desks in their city-centre offices and begin their lives as remote workers who work from home (WFH).

Now there are many things which need to be considered when employees work from home: productivity, functionality and security are clearly among those… but don’t forget about tax.

How does tax play a role? Well, an employee going to work from home isn’t as simple as moving their workstation into their spare room for the foreseeable future. Due to the US tax system, you can tread in murky waters if an employee is working from home if state and local tax consequences are not considered.

Remote working

Put simply, working from a different state might mean working within a different tax framework.

Eileen Sherr, CPA and senior manager for tax policy and advocacy at the American Institute of CPAs, told CNBC: “There are some states where, as soon as you start working there, you’ll owe money. Those states will make you file a non-resident return and have withholding.”

This is likely if you live in one state but flee to another to stay at a friend or family member’s home or summer house to work during the pandemic.

Tax nexus

This legal term “nexus” is used in tax law to describe a taxing authority and a body which is required to collect or pay tax. While the definition of nexus can vary, it generally means a link or connection.

The usage of nexus is an obligation for companies who do business in a particular state to collect and pay tax on sales in that specific state. For example, if you make a sale of some goods or a service in Chicago, you will be obliged to pay Illinois state taxes.

Historically, this ‘nexus’ was based on a physical presence and connection to a state. But this all changed in 2018 when the Supreme Court of the United States overruled the physical presence rule in South Dakota v. Wayfair, Inc. This means nexus can be applied without a physical presence, so this allows states to base a sales tax collection on remote sales.

Covid-19’s impact

With Covid-19 scattering the workforce to all corners of the country this issue of nexus has reared its head. Some states have, however, revealed they won’t be enforcing some nexus provisions in regards to workers working remotely. These include:

     Indiana

     Washington DC

     Pennsylvania

     New Jersey

     Mississippi

     Massachusetts

     North Dakota

     Maryland

     Minnesota.

This year has been an unprecedented and confusing one, that’s for sure. But don’t get your tax forms and obligations confused and miss the deadline. Save time and hassle by getting them organized in advance.

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