As you sit here reading this today, I’m sure you can relate to the fact that your Payroll responsibilities and work environment are different now than they were pre-2020. If you are feeling overwhelmed and stressed about these changes, you are not alone. Eighty six percent of HR professionals said their stress has increased over the past year. A major factor impacting HR/Payroll is the fallout from The Great Resignation, where due to the employee-driven market, people are leaving their roles in search of something better at a faster pace than ever before.
Another pandemic-related change that appears to be here to stay is the hybrid working model. Many employers are adapting to this new model, as the alternative is dealing with an unsatisfied employee population that is willing to go to another company that allows their employees to work remotely, at least part of the time.
Challenges rising from these new distributed workforce trends run the gamut – from added strain placed on the onboarding process due to high turnover/constant hiring and having to onboard employees remotely to struggling to provide a consistent employee experience and staying on top of ever-evolving state-level compliance requirements as you welcome employees from new states to your organization.
These workforce trends have had a particularly significant impact on a key payroll activity: tax withholding.
There are a growing number of questions surrounding the right way to capture elections for your hybrid or geographically diverse workforce.
In this article, we’ll cover some of the top challenges employers are facing along with insights & tips on what you can do to simplify the process while remaining compliant.
Reciprocal agreements are adding complexity to the already challenging process of managing elections for hybrid workers.
Many HR/Payroll professionals are struggling with how to handle tax elections for employees who live in one state but work in another, or employees who are working remotely from multiple locations. In this scenario, generally speaking, employers are required to withhold taxes in the state where the work is performed by the employee.
However, reciprocal agreements that exist between certain states make this task less black & white. For example, 16 states, plus Washington, D.C., have reciprocal agreements in place. The reciprocal agreement is an arrangement between states that allows employers in states with such agreements to withhold based on the state of the employee's residency, instead of the state where the employee performed the work. For example, if an employee works in New York but lives in New Jersey, then the New York employer can withhold New Jersey taxes for the employee who works in New York but lives in New Jersey.
Courtesy withholding is an optional benefit where employers collect income tax for employees who live in another city. Through courtesy withholding, employees don't need to pay taxes separately, as the employer deducts these amounts and pays them on the employee's behalf.
Now this scenario becomes even more challenging when you have employees living and working from multiple locations throughout the year. In this case, withholding requirements vary by state. Some states use visit threshold or income-level thresholds to determine which state taxes need to be withheld.
The potential long-term impact of the mobile workforce could become costly.
Some states are now attempting to recoup lost tax revenue due to more people working from home on a permanent basis.
One recent example is the Massachusetts/New Hampshire case, in which Massachusetts created a new tax regulation to treat telecommuters who worked in Massachusetts prior to the pandemic as though they were still working in-state. New Hampshire sought to have the US Supreme Court decide the issue. The court subsequently passed on the case, so the question ultimately remains undecided.
If employees continue to work remotely in large numbers, it is conceivable that states will seek out ways to try and recoup some of those losses by introducing new withholding approaches. This is certainly an area employers will want to keep a close eye on for future developments.
In addition to reciprocal agreements and changing state guidelines, local regulations are another reason capturing tax elections for your hybrid workforce can be such a challenge.
Many employers must now capture locals for employees living in states that require local taxes be withheld—even if they don’t have business offices in those locations.
If your company is located in a state requiring local taxes, then you are well aware of the intricate ins & outs associated with capturing tax elections on the local level. However, if your company is not located in one of these states, yet you now have employees who are working remotely from one, then you’ll need to familiarize yourself with this complex process.
There are 14 states that require withholding for local taxes: PA, OH, NY, MI, IN, KY, AL, CO, DE, MD, MO, WV. Local payroll taxes can take many different forms and can have varying requirements by state. Most are withheld from the employee, but there are some taxes that are paid by employers.
The majority of local taxes are calculated using the percentage method, however, there are some other common local tax types that should be taken into consideration as well.
Most common types:
- City service fees
- City, county, and school district income taxes
- Expense taxes or head taxes
- Occupational privilege taxes
- Transit taxes
Several states and some localities have issued guidance regarding withholding requirements for employees working from a different state. Generally, these guidelines explain that the employer does not need to adjust withholding if the employee is temporarily working from another state solely due to the COVID-19 pandemic.
It is likely that guidelines will change as more and more employees are making their new mobile work arrangements permanent.
With this in mind, employers will now need to know and apply local jurisdiction tax codes for employees living or working from one of these complex states. For instance, in Pennsylvania, employees are required to complete a Residency Certification Form upon hire (and with any subsequent change in address) to confirm the PSD Codes and EIT Rates. Without an automated process in place, this step falls on the Payroll department to manually identify and enter accurate local tax codes on the employee’s tax profile.
Without proper solutions in place, employers are having to implement manual steps to ensure they remain compliant.
We’ve heard from employers who feel the need to conduct weekly, or even daily, audits to ensure they’re accurately capturing tax elections according to the various jurisdictions. This manual process is not only time consuming but also leaves room for human error and increases your risk of liability.
Leveraging compliance technology, like CIC Plus’ Tax Withholding Services, can help you automate the entire tax withholding process while ensuring you remain compliant.
One large financial institution using CIC Plus services shared that before implementing our Tax Withholding Services they were manually validating employee addresses, providing tax withholding forms and local tax codes based on the address provided, and even conducting daily audits to ensure appropriate taxes were being withheld for employees who moved work or home locations. They understood that their daily audits were inefficient and error-prone, especially given the fluctuation of work locations and multi jurisdiction time allocation due to COVID. On top of the inefficiency issue, the lack of automated data validation was increasing their need to issue W-2 corrections and their risk of liability.
This employer now leverages CIC Plus' Tax Withholding Services to manage their employees’ federal, state and local tax elections. Our solution validates the employee's address and automatically presents the correct tax forms to each employee based on their work and home addresses. Local tax codes also are automatically assigned through address validation.
They also recently introduced CIC Plus’ multi-address withholding form to ensure their employees are being taxed correctly – no matter how many locations they work from, which is essential in today’s post-pandemic remote work environment. This capability allows employees to allocate percentages for each of their work locations.
With these solutions, CIC Plus eliminated the need for manual intervention, increased process efficiencies, and decreased the company’s risk of liability, all while enhancing the candidate and employee experience.
What’s the future forecast of what’s to come for tax withholdings in this new hybrid workforce?
No one can confidently predict where this is going to end up, so uncertainty is the rule of the day. Luckily, there are many partners, tools, and resources available to employers to help simplify and automate this convoluted compliance process. CIC Plus can help you stay ahead of regulatory changes impacting tax withholdings and ensure you are ready to respond as requirements evolve.
