The Rise of Remote Work: How It's Changing Tax Compliance for Businesses

By Cherie Sayban, CPA

The rise of remote work has transformed the modern workforce, offering businesses and employees flexibility, enhanced work-life balance, and increased access to a global talent pool. However, this shift has introduced significant complexities in tax compliance. As a CPA with over 25 years of experience, I’ve seen how these new working arrangements are reshaping the tax landscape. Understanding the implications of remote work for businesses is essential for staying compliant and avoiding costly penalties.

Multi-State Taxation: A New Challenge

One of the most significant challenges of remote work is multi-state taxation. Before the remote work trend, most employees worked in the same state where their employer was located. Now, employees may live and work in one state while their employer is based in another. This can trigger tax obligations in multiple states, both for employees and the businesses they work for.

Nexus and Withholding Taxes

“Nexus” is a key concept in determining a business’s tax obligations. Nexus refers to the degree of connection a business has with a state, which may require the company to register, file tax returns, and collect sales tax in that state. With employees working remotely from various states, businesses may unintentionally establish nexus in states where they have never operated before.

For instance, if your business is based in New York but has an employee working remotely in California, your business may now have nexus in California. This means you might need to comply with California’s tax regulations, including withholding state income tax from that employee’s paycheck, registering for unemployment insurance, and filing corporate income tax returns.

Payroll and Employment Tax Complexities

Remote work has also made payroll tax compliance more complex. Businesses are now responsible for ensuring that they are withholding the correct state and local taxes based on where employees work—not just where the company is located. Each state has different tax withholding rules, and local jurisdictions may have their own payroll tax requirements.

Some states have reciprocal agreements, allowing employees to pay income taxes only in their home state, regardless of where they work. However, if no such agreement exists, businesses may be required to withhold income taxes in both the employer’s state and the employee’s state, potentially leading to double taxation if not properly managed.

Home Office Deductions and Reimbursements

Another important consideration for businesses with remote workers is the tax treatment of home office deductions and reimbursements.

Home Office Deductions for Employees

Under the Tax Cuts and Jobs Act (TCJA), employees working remotely are generally not allowed to deduct home office expenses on their federal tax returns. However, independent contractors and self-employed individuals may still be eligible to claim a deduction for a portion of their home office expenses, such as rent, utilities, and internet, as long as they meet the IRS's requirements for a “regular and exclusive” business use of their home space.

Reimbursement Policies for Employers

Employers should also review their reimbursement policies for remote workers. While employees may not be able to deduct home office expenses, employers can reimburse them for work-related expenses like office supplies, internet costs, or a portion of their utility bills. In some states, such as California, employers are required to reimburse employees for necessary expenses incurred while working remotely. These reimbursements are generally tax-deductible for businesses, but they must be carefully documented to avoid triggering additional tax liabilities.

International Tax Considerations

For businesses with employees working remotely from foreign countries, the tax compliance landscape becomes even more complex. International remote workers can create permanent establishment (PE) risks, meaning that a business may be considered to have a taxable presence in a foreign country simply because it has an employee working there.

If your business is deemed to have PE in another country, you may be subject to that country’s corporate income taxes, VAT, and other regulatory requirements. Navigating international tax treaties, foreign employment laws, and PE rules requires careful planning and often the assistance of a tax professional familiar with international tax regulations.

State-by-State Variations and Evolving Legislation

Remote work has prompted many states to reevaluate their tax policies, and businesses need to stay informed of these changes. For example, some states, like New York and New Jersey, have “convenience of the employer” rules, which require remote employees to pay taxes in the state where their employer is located if the employee is working remotely for their own convenience, rather than out of necessity. Other states have created temporary COVID-19 relief measures that allow businesses and employees to temporarily avoid tax obligations in states where they would not typically have nexus. However, many of these relief measures have expired or are set to expire, so it’s crucial for businesses to monitor the evolving legislative environment.

Compliance Strategies for Businesses

Here are key strategies businesses can adopt to stay compliant in the era of remote work:

1. Conduct a Nexus Review: Regularly evaluate whether your business has established nexus in new states due to remote employees. This may require registering with state tax authorities and complying with new filing obligations.

   
   

2. Update Payroll Systems: Ensure that your payroll systems are updated to accurately withhold state and local taxes based on where your employees are physically working.

   
   

3. Consult with a CPA or Tax Professional: With the complex web of state, federal, and international tax laws at play, seeking advice from a tax professional is essential to avoid compliance pitfalls.

   
   

4. Implement Clear Reimbursement Policies: Make sure you have a written policy in place for reimbursing employees for remote work expenses and document these reimbursements carefully to ensure they are tax-deductible.

   
   

5. Stay Informed of Legislative Changes: Tax laws are constantly evolving, especially in response to the increase in remote work. Make it a priority to stay updated on state and federal tax changes that impact your business.

The rise of remote work has opened up a world of opportunities for businesses, but it has also added layers of complexity to tax compliance. As businesses continue to embrace flexible working arrangements, it’s crucial to understand the tax implications and adjust your strategies accordingly. Navigating multi-state taxation, payroll complexities, and international tax risks requires vigilance, planning, and often professional guidance.

By proactively addressing these issues, businesses can remain compliant, avoid costly penalties, and continue to thrive in the remote work era.

About the Author

Cherie Sayban is a certified public accountant. She has over 25+ years of experience in Finance, Accounting and Bookkeeping.  

​Cherie Sayban CPA provides various financial and accounting solutions to small and mid-size businesses. Our portfolio includes: tax preparation, payroll preparation, accounts receivable and payables, general ledger, and QuickBooks . Our bookkeeping workshops are offered both in-person and virtually.

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