The legal and tax implications of taking your company remote permanently

With Twitter CEO Jack Dorsey's recent announcement that he intends for his company's employees to work from home permanently, many business owners may be considering the possibility of transitioning their workforces remote on an ongoing basis. 

At first glance, the benefits in this age of COVID-19 are clear: The need to monitor social distancing is eliminated, and there's no concern about community spread or jeopardizing your employees' health. 

Legal and tax experts, however, said that there are a number of issues to take into account on both the federal and state fronts when you're considering going completely remote. 

Worker's compensation and accurately tracking hours are among the top legal concerns

Johnny Wang, a partner at the law firm Stinson LLP based in St. Louis, told Business Insider that the first step owners should take when considering moving their company remote is having a conversation with their workers' compensation carrier to explore the potential ramifications. 

"This is an issue that just has tons of complexities," Wang said. "So when companies make that unilateral decision to allow employees to be able to work remote, sometimes they forget that liability for injuries to your employees still exists when they're working from home — and what do you do when you have no control over the work environment?"

Wang said that in many instances, workers' compensation carriers are willing to extend coverage for injuries to employees working remotely, but that companies should review their policies for coverage implications — it's generally not possible for employees to forego their rights to coverage just because they'll be working from home.

"Companies should also update their insurance applications to indicate their intention to have a large population of remote workers," he told Business Insider. "In the majority of jurisdictions, waiving workers' compensation claims prospectively or even after the injury has occurred would require approval from an administrative law judge or other court supervision."

Another issue Wang flagged is how to institute tracking that will properly capture the time spent working by non-exempt employees, employees who must be paid overtime and are covered by other regulations under the Fair Labor Standards Act. 

Wang's concerns center on accountability for time worked by employees no longer in an office setting. "How do you track wage and hour compliance," he said. "How do you track hours worked, how do you make sure they're making overtime?" 

Of course, there are many computer- and SaaS-based time-tracking systems available that include log-in/log-out and screen-capture functionality that can obviate some of these concerns. Those systems don't account for every activity an employee undertakes during the course of the business day, however. 

"That's only a part of it. Not every single minute that's spent working necessarily involves a computer," Wang said. "You can have a situation that involves reviewing documents, looking at printed material, for example, that involves time worked that isn't captured. It's not foolproof."

According to Wang, many times these issues go unnoticed when the employer-employee relationship is on good terms, only to surface when things hit a rocky patch — which is why it's all the more important to have terms and systems set in place from the onset of a remote working arrangement. 

"Everything's fine when the relationship's great with the employee, but when you need to terminate them, all of the sudden they say, 'Hold on, I was working 10 hours a week overtime and you didn't pay me for it,'" Wang said.

It's important to consider various jurisdictional issues when you make a permanent switch to working remote

When you make the switch from having your workforce employed remotely or to honor the requirements of state or local shelter-in-place requirements to having a fully remote workplace strictly as an everyday operational choice, your workers will then formally be employed in the state and locality where they reside — not in the state and locality where your business is headquartered. That move could come with tax implications, chief among them whether your company would be considered to have opened up a base of operations in a new state even if just one employee works at home there, experts at Grant Thornton told Business Insider. 

"From a state and local tax perspective, businesses have to consider how to withhold income tax on their employees," Jamie Yesnowitz, principal and leader of the State and Local Taxation-National Tax Office at Grant Thornton LLP, said. "Businesses are also subject to entity-level taxes, and they need to understand whether changing their model from physical to virtual will change or expand the number of jurisdictions in which they have to file and pay taxes. Employees will be working in the states where they are currently telecommuting, rather than the states in which the office of the business is located."

When the coronavirus crisis first sent many employees home to work, states reacted by making a number of different decisions with respect to how to handle withholding, Jeff Martin, a partner in Grant Thornton's Washington National Tax Office, told Business Insider. Martin cautioned that for companies who have made the transition to working remotely on a temporary basis, any withholding relief that was granted will lapse, so now's the time to make a complete evaluation of tax withholding requirements. 

"In addition, employees who work remotely won't be working just from their houses. An employee may work from multiple locations, such as a vacation house, a parent's house, or a friend's house, all of which may be in different states than the employee's residence," Martin said. "Employers will need to implement time-tracking systems that require employees to record where they are providing services so the employer can properly withhold and pay employment taxes in the appropriate jurisdictions."

Equipping employees may result in taxable income for them

Once business owners have withholding issues nailed down, there's also the matter of equipping your employees for work. Your employees may already have a computer, but do they need a printer, an ergonomic chair, maybe a standing desk to use so they can safely get the job done for you, and what are the tax implications to you and to them of getting them all set to work? 

"Often these items can be provided to employees tax free as a working condition fringe, but employers should institute policies to limit personal use of this equipment to avoid complicated payroll tax issues," Martin said. "Employers who chose to help employees purchase this equipment will have to pay close attention to the tax implications and whether this could result in taxable income to the employee." 

Downsizing your digs? Watch out for taxation on gains.

If you decide to sell some unneeded real estate in the wake of sending your employees home to work, watch out for tax implications there, too. 

"The business or its owners could be subject to significant state and local income taxation depending upon the size of the gain that results," Yesnowitz said. "The sale or downsize of a significant portion of the business is also likely to change the amount of payroll, property, and sales located in each state, which measures are integral in determining the amount of tax to be paid to each state."

 

This article was written by Julie Peck from Business Insider and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.