Remote Work Becomes a Tax Compliance Challenge Worrying CFOs
After the pandemic, remote work has become widespread, with employees working across state or national borders as the norm, but tax compliance issues have come to the forefront. Topia's Adapt survey shows that 28% of employees have worked outside their state of residence, and only one-third reported all days to HR. As the tax gap widens and audit risks rise, CFOs need to view remote work as a necessary condition for talent competition and balance compliance with employee expectations through location-sharing mechanisms.
Editor's note:This article is a contributed piece by Steve Black, co-founder and chief strategy officer of Topia, a talent mobility software company. The views expressed are solely those of the author.
Before the COVID-19 pandemic, business travel was already a tax compliance headache for CFOs. Tracking travelers' whereabouts and calculating tax implications often required significant manpower. Now, the prevalence of remote work has put every employee potentially at risk of the same compliance issues as business travelers. Latest data shows that remote work is exactly the tax compliance quagmire CFOs are worried about.
Since the pandemic began, 28% of employees report having worked outside their state or country of residence, but only one-third have reported all days to HR. If CEOs and CHROs have adopted "work from anywhere" policies, companies are highly likely failing to withhold payroll taxes as required by law. This is a key finding from Topia's annual "Adapt" research survey.
In recent years, many CFOs have been willing to take risks on remote work compliance. However, tax authorities are now facing revenue shortfalls. They know remote work is a weak point for companies, and therefore an opportunity for auditors.
In 2021, California expects tax revenue to drop by $26 billion to $32.2 billion compared to pre-pandemic levels, while New York expects a shortfall of $13.3 billion. For these states, corporate audits could yield a high return on investment. Meanwhile, Massachusetts wants to tax New Hampshire residents who commuted to work in the state before the pandemic, and the U.S. Supreme Court will rule on this.
Remote work was supposed to be a stopgap measure for a temporary pandemic. Now, remote work is not only the norm but also an employee expectation. According to the reasons revealed by the Adapt research, this is not necessarily the compliance disaster CFOs fear. Instead, mobility freedom may become a minor compliance challenge while serving as a huge advantage in attracting and retaining talent.
Remote work has become an employee demand
First, some background: Between December 11, 2020, and January 12, 2021, CITE Research surveyed 1,250 employees on behalf of Topia, half based in the U.S. and half in the U.K., all working for international companies with at least 2,500 employees. Among respondents were 250 HR professionals. 91% of employees believe they should have the right to work from anywhere as long as they get the job done.
This upends two decades of corporate culture. Before the pandemic, employers competed to build multi-million-dollar campuses offering perks like gourmet food, on-site fitness classes, dry cleaning, free massages, and nap pods. Now employees say, thanks for the amenities, but let us choose where we work, and we'll handle our own entertainment and childcare.
In fact, mobility freedom has become so important that employees rank remote work as the second most attractive trait of an employer—right after high pay, but ahead of career development and corporate culture. Interestingly, HR professionals also support this view, even though they invented the aforementioned office perks. 94% of HR believe that increased remote work helps build more diverse teams.
Remote work is not an out-of-control temporary policy that evolved into a permanent right, thereby throwing tax compliance into disarray. Rather, CFOs need to view it as a competitive requirement in a fierce talent market.
HR says one thing, does another
The enthusiasm of employees and HR leaders for remote work does not make compliance issues disappear automatically. As mentioned earlier, 28% of employees have worked across tax jurisdictions, but only one-third reported all days. If HR knows about this, it's already a problem; the bigger issue is that most HR teams think it isn't happening at all.
The Adapt survey shows that 78% of HR professionals are confident employees will self-report when working remotely. In reality, only 33% of employees claim to have reported all days, even though 61% are aware of the tax implications. About a quarter of employees do not report any remote work days at all.
Remembering to self-report can be difficult. More importantly, employees from expensive cities like San Francisco and New York know or worry that if they move to a lower-cost city, HR might adjust their salary down to local market rates. If housing costs are only a third of those in a big city, keeping the difference is certainly attractive.
HR professionals deserve special mention here. They are supposed to understand the compliance risks of working across tax jurisdictions, yet HR practitioners are more likely than the average employee to have worked out of state or abroad, and only 46% claim to have reported all days. Those HR professionals who believe they know everyone's whereabouts haven't even reported their own days.
CFOs might laugh at HR's oversight, but when auditors come knocking over remote work issues, forcing companies to pay hefty legal fees and fines, that laughter offers little comfort.
Location sharing
In the Adapt survey, 94% of employees said they accept employers tracking their location at the national, state, and city level—enough to meet payroll withholding and immigration risk compliance requirements and establish an audit trail. 81% of employees even accept street-level location tracking (though compliance does not require such granularity).
Given the privacy controversies sparked by Silicon Valley tech companies, this data might be surprising. The fact is, people often intentionally or unintentionally allow apps and websites to track their location in exchange for value—such as more accurate news recommendations and weather forecasts. What people don't trust are companies that use personal data to manipulate thoughts and purchasing behavior.
In contrast, when an employer says, "We need to know your approximate location to fulfill tax obligations," employees don't even shrug. Compared to the round-the-clock surveillance of profit-driven tech companies, a plugin on a work laptop that records work location seems harmless. It's more like "location sharing" than "tracking" with Big Brother overtones.
Risk-taking or compliance
The Adapt data shows that the tax reckoning for remote work is coming, and taking compliance risks is unwise. Employees expect the right to work remotely and will choose employers who embrace mobility freedom. In exchange, employers can require knowing where employees work to meet compliance obligations. The few who are reluctant to share their location automatically can submit it manually. This is a fair trade that allows CFOs to protect the company without undermining their competitiveness in the talent market.