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Remote and Hybrid Workers: State Tax Incentives and Compliance Challenges

Spark Team

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The pandemic accelerated trends that were already occurring such as advances in technology that allowed businesses to offer more flexible work schedules and hybrid or remote workplace options. Whether it be for your own organization, your clients or both, it's important to be aware of a number of compliance challenges and considerations.

The global pandemic marked a major shift in how and where employees conduct work. As the pandemic recedes, many companies are now adapting and planning for new combinations of remote and on-site work arrangements. Among the many impacts these trends have had on our society and economy, one that continues to evolve is the impact on employer tax credits and incentives.

To maximize their return on tax incentives for which they may be eligible, employers need to understand and remain aware of how states are assessing where an employee conducts work for the purposes of payroll taxes and tax incentives.

Below is an overview of tax credits and incentives compliance considerations for a remote/hybrid workforce:

States are adapting; Incentive programs are evolving

In response to the changes in where and how employees work, states have begun to issue changes to their tax incentive programs. This fluid environment requires businesses to be aware of and understand the laws, regulations and incentives in effect in the state in which they operate, but also monitor those conditions which may apply to the states in which their employees may reside — whether temporarily, permanently, or in some hybrid fashion.

What constitutes a "remote" employee?

From a tax incentive compliance perspective, remote and hybrid worker definitions are uncharted territory. If not properly managed, many circumstances could create significant new administrative burdens, HCM challenges, payroll or other compliance problems for employers.

A fundamental definition of remote work is the practice of employees doing their jobs from a location other than a central office operated by the employer. Remote work does not prescribe where someone works, just that the employee rarely goes into a traditional place of business to do their job. Their day-to-day norm is to work from some other location, which may be in their home but is not limited to that location.

In addition, "working from home" may also refer to a temporary or less frequent version of remote work such as when a person unexpectedly works from home for a day or two because of short-term needs, but who otherwise ordinarily works from the company's physical location. This style of working is referred to as telecommuting or telework.

Pete Isberg, ADP Vice President, Government Affairs, sees states adjusting to this shift in the way we work."What might have been an occasional practice is now quite mainstream," Isberg said, "and tax authorities are adjusting."

For permanent hybrid and fluctuating schedules, Isberg suggests asking "How precise is your current tax withholding practices and how accurate does it need to be? Can you rely on employee estimates, or do you need systems to track- and what will authorities expect?"

Remote work tax incentive implications

Michael A Smith, ADP Director of Tax, Strategic Partnerships & Alliances, pointed out during a recent webcast that when it comes to the tax incentives, location matters—though each state addresses the issue in its own way when it comes to workers.

"We find many states tie incentives to job creation," Smith said, "These incentives are designed to drive opportunities, and a tangential point is there are often ties to capital investments; that can be very location specific."

Many people who found themselves working remotely took the opportunity to relocate to low-tax states or areas that better suit their lifestyle. Each state has in turn developed unique incentive programs to retain and attract businesses which are reevaluating rules and program options to see if they can recoup lost revenue.

1. Currently, there are seven states where workers incur a tax liability from their state of residence and the state where their company is located: Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania. This "double taxation" has led some workers to leave these states to those with low-to-no state income tax, such as Florida. Many states, however, provide a credit to make up for double taxation.
2. Certain states have also issued specific guidance regarding the impact of telecommuting employees on the apportionment of corporate or pass-through business income.
3. Many states may not consider temporary changes in an employee's physical work location to alter the apportionment of income during the periods in which temporary telework requirements are in place, or through a specific end date.

Beyond these broader trends, here are some specific examples of how states are adjusting and adapting their tax credit and incentives programs to account for remote and hybrid work.

Arizona

The Arizona Commerce Authority (ACA) has made changes to some of its incentive programs, including allowing remote workers to count for its Qualified Facility Tax Credit Program, and to allow for flexibility in hiring counts for its Traditional and Rapid Employment Job Training Programs.

Michigan

The Michigan Business Development Program allows companies to count remote work jobs if all program and job requirements are otherwise met.

Utah

Utah's Rural Online Initiative, offered through the Utah State University Extension program, provides remote work training and certification for individuals, an e-commerce course for rural businesses, and the Rural Online Initiative for communities preparing for the future of work, including well-paying remote jobs.

What employers should do next …

While the new dynamics of remote work have made things increasingly complex from a compliance standpoint for employers, the basic steps employers should take when factoring remote workers into their tax credit and incentives strategy are simple:

1. Determine where employees are working
2. Identify all relevant laws that may apply in a state in which an employee wishes to work
3. Explore possible tax-breaks and incentive programs of states where operating
4. Explore flexible work arrangements as a means to attract and retain valuable employees

Learn more

To gain deeper insights and learn about potential compliance strategies for hybrid work arrangements when it comes to employer tax credits and incentives, register for and replay this on-demand webcast: Compliance Considerations for a Remote/Hybrid Workforce led by Pete Isberg, Vice President, Government Affairs ADP, and Michael A Smith, Director of Tax, Strategic Partnerships & Alliances ADP.

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