How are Taxes Handled in Remote and Hybrid Work Settings?

Settling Taxes When Doing Remote and Hybrid Work

Remote work has been gaining traction with businesses over the past several years, and many candidates consider remote work options to be a major factor in choosing a job and employer. While historically remote work was once seen as an option or a perk, work from home arrangement became a requirement for many employees during the COVID-19 pandemic. 

Companies had to adapt to the sudden quarantine and isolation mandates and policies yet ensure business continuity despite being unprepared for the majority of the workforce to work remotely. The pandemic created an urgency to implement remote work options, and businesses rushed to adjust to the new workplace paradigm.

As businesses rushed to implement remote work arrangements for employees, the tax implications for remote and hybrid workers have been confusing for employers and employees alike. 

How will taxes be paid in a remote or hybrid setting? Which tax laws will apply? Are there defined tax rules for remote and hybrid work? 

Businesses must first be able to answer these questions as it plays a crucial part in solidifying the remote work policies of a company.

SCG brings years of experience as a leading expert in change management and workplace strategy and can help your business evaluate and establish the right remote work policies for your organization, including how to handle the changes in tax implications with your planned remote work programs. 

Tax Implications to Consider Due to Remote Working

In a traditional office setting, taxation is fairly simple since the company will adhere to the tax regulations of the state or city reflected on its business address. In general, employers and employees understand the local and state tax implications of working in a traditional office setting. 

However, with the growth of remote and hybrid work environments, tracking payroll tax withholdings has become complicated for both companies and employees. 

While tax considerations aren’t usually at the core of priorities in terms of considerations for taking or offering a remote work job, it remains an important matter that must be discussed between employers and remote employees.

With the shift to remote work, many companies offer in-house tax expertise or discounts for third-party tax preparers to help employees navigate the tax implications of remote work. 

Let’s break down the tax implications of remote work and hybrid work.

Tax Implications of Remote Work

For many remote employees, employers will not need to submit a report of their wages to the local tax authority. However, companies will need to report wages to states where employees are working.

Payroll and the ensuing taxes are now tied to the home address of remote workers. As such, employees are no longer covered by the company’s business insurance policy, which is only applicable to any declared income and tax within the city of a business address. 

This means that employers will have to keep a record and certification of the residency of remote teams so the business can track which local taxes should be processed and where they should be settled.

Tax Implications of Hybrid Work

A more complicated scenario is when a business offers a hybrid workplace strategy for its remote employees. 

A hybrid workplace strategy entails employees working both in the office and remotely, within a given schedule or time frame. How do tax regulations impact hybrid work arrangements? Will the business need to record days spent in the office and submit those separately for the number of hours rendered remotely?

This could even be more difficult to manage if employees working hybrid do not have a fixed schedule on when or how many hours they work in the office. Will the rates change every pay period?  This is further complicated when employees live across state lines and travel in.  Even in a localized hybrid situation, where employees may live in the metropolitan area of where the company’s office is, the employee may work in two different local tax school districts.

There is also the consideration of travel expenses, home equipment provisions, and payment for services needed to be able to work in a hybrid setup. 

As such, while hybrid work is a great work strategy to implement because of its many benefits, companies should be prepared to handle the intricacies it brings in terms of proper taxation fees.

Of course, that is not to say that tackling hybrid work would entail more work for employers. With proper planning and consultation from proper tax experts, this part of the process will easily be planned out, as it only needs to be organized during the transition phase. Once it is set in place, it would just become a regular part of the employer’s monthly or annual responsibilities.

Communicating Tax Changes to Employees for Remote Work

With so many changes affecting not just employers, but also remote workers as well, it is crucial to ensure that all the details about taxation are discussed thoroughly. 

If an employee is left unaware of his or her tax implications and sees its implications on payday, it could have a negative impact on how employees view being part of the remote team. 

Remote workers, especially those that were sent into the situation due to circumstances outside personal choice, already have a lot of stressors to worry about, especially during the initial phases of all these changes. They also sometimes worry about their work and career visibility, especially because there remains a misconception that when employees are not in the office, the organization does not see the output and work they provide for the company.

As such, it is important for employers to guarantee to their employees that tax management will not add to their remote work concerns. 

There are several ways that employees can help manage the taxation process. But of course, they need help figuring it out, and they look to the company for direction. Employers should assist their employees in understanding the tax implications of remote and hybrid work, and offer them resources, if available. 

Working remotely or hybrid could be the personal choice of your employee. But employers must find ways to ensure a smooth working relationship among everyone in the organization, may they be working at home, or in an office.

Will Offering Remote and Hybrid Work be Worth all the Changes to Taxation Considerations?

After researching all the tax implications, businesses might be tempted to doubt adopting a remote work setup. However, there are numerous advantages to implementing a remote work setting. Creating the right processes so that this strategy works towards the benefit of your business is key to its success. 

SCG can help your organization transition through these changes with assessments and surveys that can gather the data needed for your company to thrive in a hybrid work environment. Get a headstart on this workplace evolution and let your business be more prepared for remote working. Fill out the form below and let us help you get started.