What Payroll must consider when withholding tax from remote workers’ pay

Even as many offices across the country reopen, hybrid work has become the norm. There are more remote workers than ever before. Many employees are spending all or part of their workweek telecommuting. And it’s critical for Payroll to keep up with the tax implications of these work arrangements.

There are multiple problems companies can encounter with remote workers, as discussed recently in a session at the 2022 American Payroll Association Congress, Employment Issues Encountered with a Remote Workforce, presented by Rebecca Harshberger, CPP, and Mindy Mayo, CPP.

You might find out about a worker whose primary residence is in one state, but they’re working regularly from another one. In addition, the summer weather may inspire more of your people to take a “workcation,” where they travel to a different state or country while still performing their work duties, in lieu of taking vacation time.

Depending on where the person’s working, Payroll may have to withhold tax for the state of residence, the state where the employee’s currently working – or both. There’s also local city and municipality taxes to consider in states like Pennsylvania, Ohio and Oregon. And it gets even more complicated when global taxation is involved.

Checking up on your remote workers

With all this in mind, you may want to ask Payroll to check in with your remote workers periodically about where they perform the majority of their work for the week so they’ll know which tax laws apply. (Note: It might also be smart to check in with your on-site workers, too. Some of them may have moved and not informed Payroll yet, and that could also affect their tax liability.)

Be sure Payroll also confirms the dates they’ve been working from the new location, since retroactive adjustments might need to be made (e.g., refunds if too much tax was withheld). Depending on the length of time, teleworking could create nexus for your firm, increasing employer tax liability as well.

Remote employees may not always be as up front as you’d like about the location they’re teleworking from. In these cases, Payroll may want to huddle with other departments for clues.

For example, A/P can be on the lookout for employees who are submitting expenses for reimbursement that originate in a different state than the one you have on file. Payroll can also reach out to IT to see if they can track the IP address assigned to an employee’s computer by their internet provider. That can help you find out if they’re logging in for work regularly from a different location.