With so much attention drifting toward the productivity of remote workers in the post–COVID-19 environment, many CFOs are overlooking the related critical tax and compliance issues. As remote work continues to grow, companies could run into massive consequences in the near future if tax and compliance problems are neglected.
This article will shine a light on the most urgent tax and compliance challenges that are springing up out of remote work, and highlight what CFOs need to do to protect companies from these concerns.
Overlooked Remote Work Tax and Compliance Risks
Remote work is becoming the norm, and it’s sparking tax and compliance risks that aren’t always obvious. As employees move across state lines and international borders, their tax obligations may be shifting, and they could be increasing an organization’s risk profile. The following are a few remote work considerations that are often overlooked:
Mobile tax complications.
Whether the company has adopted a fully remote or hybrid model, it could be complicating its tax situation. For example, if an employee decides to work in a new state part-time, that can easily trigger extra withholding obligations in multiple states. If the company doesn’t understand where the employee is working and the rules that each state follows, workers could end up sending payments to the wrong entity, leading to frustration and penalties for both the employee and the company.
Tax requirements can become even more complicated if employees are traveling freely across international borders. Unregulated international work can stir up additional reporting, Social Security, or withholding requirements. Adding to these complications is the fact that different nations often hold different work requirements, laws, and definitions for full-time employment.
If CFOs ignore these reporting and withholding complications, they can open the company up to audits, set off tax violations, ruin the organization’s reputation, and result in costly tax penalties.
Duty of care issues.
Unregulated remote work can also create additional duty of care risks—especially if employees are working internationally. If an employee is in a country where they are exposed to pandemic outbreaks, political unrest, natural disasters, or other unplanned events, they may end up stranded in a dangerous area without needed support from their employer. This can result in lawsuits, public relations problems, and long-term reputational damage to the company.
Diluted incentives.
When employees work across multiple jurisdictions, their Social Security or withholding requirements can shift from one area to the next. One common example of this issue becomes clear with companies that offer equity compensation. Because equity compensation often carries trailing obligations, employees could end up owing tax on their compensation even after they have physically left a location.
If the company does not know where an employee is working and has been conducting work, it is impossible to adjust compensation to account for those extra tax obligations. As a result, employees may feel short-changed or as if their compensation is shrinking.
Why CFOs Need to Retool Remote Work Tax Compliance Strategies
Many CFOs are now realizing that employees are scattered across the globe, and employers could have few ways to track their whereabouts. Although not all CFOs realize it, not tracking an employee’s work location opens both the employer and employee up to several risks. The following are some of the biggest risks companies face when they rely on outdated mobile tax compliance strategies:
Tax penalties.
If an employee is moving to different work locations often, it is easy for them to misunderstand their tax and reporting obligations. Unfortunately, if money is sent to the wrong tax entity or underpaid in an area, it can result in violations, tax penalties, and even jail time.
Those dangers increase for high-profile employees, C-suite executives, and high-paid workers. For example, consider the current tax fraud trial that pop singer Shakira is facing. Prosecutors allege she owes taxes to Spain because, although her official residence is in the Bahamas, she allegedly spent more time living in Spain than she reported. If convicted, she could face a large fine and up to eight years in prison (“Pop singer Shakira to face trial over tax fraud in Spain,” Associated Press, Sept. 27, 2022, https://bit.ly/3JaYd7z).
Although Shakira is not a remote worker, her case highlights the dangers individuals face if they neglect to pay tax authorities the proper amounts due. Similarly, high-earning employees who travel untethered for work could end up owing extra tax or Social Security in an international location—and they may trigger other violations.
Corporate tax losses.
In both international and domestic U.S. cases, remote workers could cause tax losses for the entire company. For example, one company could end up having to pay an estimated $500,000 after a remote worker failed to disclose that he was working in California and Texas (Aaron Mok, “Tech CEO says he was hit with up to $30,000 in surprise taxes and fees after a software engineer worked remotely in California and Texas without telling the company,” Business Insider, Nov. 11, 2022, https://bit.ly/3NrXgKI).
What many employees do not realize is that working in multiple states can result in multiple tax withholding requirements. When employees works within certain states, they may also end up creating a corporate tax presence there, generating extra tax obligations for the company.
Reputational damage.
If the company or high-profile employees violate tax laws or are noncompliant, it can wreck that organization’s reputation. At the same time, noncompliance can set off red flags for regulators, meaning the company could be at risk of additional audits.
Three Questions CFOs Should Ask
In many cases, CFOs will need help and information from a global mobility tax professional to revamp their remote work compliance strategies. If company leaders want to start rebuilding their remote work compliance strategies on their own, however, there are a few urgent questions they need to answer.
Ask the head of the human resources department, “What is our company doing to know where our remote employees are physically working?”
For most jobs that can be done remotely, whether on a full-time remote or hybrid basis, the location where an employee is actually working is not immediately obvious to the company. With virtual backgrounds being used on video calls, a remote employee can essentially hide their location from their employer.
Nearly all tax authorities in the United States and across the globe, however, expect an employer to track the location where their remote employees are working. Employers are then obligated to use that work location data and take appropriate action in several areas, including the following:
- Corporate tax issues related to permanent establishment and nexus matters
- Employment law issues and employee benefit plans
- Employer payroll reporting and withholding obligations.
Any company that does not have a plan or process in place for tracking the whereabouts of its remote employees could be exposed to substantial tax compliance risks.
Ask the head of the payroll department, “What is our company doing to ensure we are compliant for employees that are working remotely on a temporary basis, such as for a few months, and then returning to their home location?”
For many companies in the United States, the answer to this question is that the employer simply withholds taxes in the remote work location while the employee is there temporarily. For example, consider a California-based employee who decided to work remotely in Colorado for three months. Many companies would simply switch the employer withholding to only withhold in Colorado for that three-month period. Under these circumstances, however, California reporting and withholding would also be required while the employee is in Colorado.
Any company that does not have a sophisticated multistate payroll reporting and withholding process in place and corresponding payroll capabilities could be at risk for underreporting and underpayment penalties.
Ask the head of the stock administration department, “What is our company doing to ensure the trailing withholding obligations are met for remote employees who have moved?”
For many companies in the United States, the answer is that the employer simply withholds taxes on equity compensation based on the current address in the company’s human resources information system. This approach is often not correct, however, because most states (and many other countries) require that a portion of the equity compensation be reported in payroll and taxes be withheld in the tax jurisdiction where the employee was present when the award was granted.
Any company that is simply reporting equity compensation and withholding taxes in the location where the employee is physically present when the equity vests or is exercised could be at risk for underreporting and underpayment penalties.
Proactive CFOs Will Thrive in the Remote World
Looking ahead, remote work shows few signs of disappearing. And as remote work remains pervasive, so do the tax and compliance risks that go along with this new type of work arrangement. CFOs can protect against those risks by asking critical questions of the HR, payroll, and stock administration departments while utilizing third-party support. By taking proactive steps now to prepare for remote tax and compliance dangers, CFOs can avoid potential messes in the long run.
