Common Pitfalls in Payroll Tax Compliance (and How to Correct Course)

At this stage in our post-COVID world, business owners and operators are coming to grips with many of changes initially believed to be short lived and permissible only out of necessity during the pandemic. Now, for instance, the permanence of remote and hybrid working accommodations are a clear reality, and flexible work environments are more generally accepted than ever before. Yet with remote work comes a variety of regulations and?compliance issues?firms have overlooked along the way, either out of ignorance or out of the idea operations would return to their pre-COVID standard.??

Perhaps most prominently is the impact remote and hybrid working conditions are having on payroll tax reporting and compliance. More firms are finding themselves to be non-compliant when it comes to this aspect, and understandably so. Before the pandemic, most organizations had employees who performed their work at a centralized office, often a headquarters for the company itself. The place of work and the place where the work was being done were the same. This made payroll taxes straightforward in that companies could report based on a single location and only needed to worry about compliance with one set of local and state laws.??

In this new normal, with employees working remotely often from a variety of locations, companies are faced with a more complex payroll tax situation. The shift from centralized to?remote or hybrid work?had a direct impact on how businesses should be reporting and paying payroll taxes to different municipalities and states. While it became an issue during the pandemic, many businesses and even accountants overlooked the severity of the impact, thinking the situation would be temporary. This has risen to the forefront of business operations for many businesses of late as the permanence of remote and hybrid work has forced employees and employers to acknowledge the place of business and the places where work is done are often far different from one another.??

This is due, in part, to an increase in attention given to the matter by tax professionals who are looking out for their customers to find the best deductions and criteria submission for their financial needs. In many instances, it is more advantageous for employees to pay taxes based on their suburban location than the metropolitan region where their employer may be headquartered. Consider the remote employee who lives in Kansas but is employed by a firm in New York City. The taxation should occur for the state of Kansas, whose argument will be that the work is being done in their jurisdiction, regardless of the location of the employer. Those taxes are likely more profitable for the employee filing their income taxes as well.??

This has become a major issue for employers, evolving into an administrative headache beginning in the first quarter of 2022. Businesses now need to be cognizant of where they are hiring people, not just who they are hiring, for roles within their organizations. Put simply, there are two categories of employer-employee situations where this can occur: when hiring people in other states and when hiring people locally who then perform work in other locales. In both cases, the company owes taxes to those locales, which can include everything from state to county laws.??

Hybrid employees, defined as those that work sometimes from the office and sometimes from a remote location, pose a particular complication for employers when it comes to?payroll tax compliance. Originally, the employee reported to an office headquartered in the same state as the company itself. Now that individual no longer works in the office on a regular basis. This is a case where businesses can benefit from working with a taxation professional or outsourced human resources consulting firm that can provide best practices for ensuring compliance. Aspects to consider include, but are not limited to, how often the individual works from home, how often they report to the office, what tools or measures are used to discern between the two, and how the company can best manage the taxation portion of this arrangement.??

Completely remote employees present an equally complex taxation situation to navigate. Post-COVID, companies that had previously only hired local candidates are now expanding their radii and their talent pool to include fully remote employees. While this can make it easier to access the right fit for a particular role without restricting a?candidate search?based on geography, it complicates the taxation process for companies that previously had a straightforward approach by employing people in states where they had never employed people before. Those states have the right to have taxes paid to them for the work done within their boundaries, but many companies fail to realize this altogether. The result can be a complicated tax compliance meltdown that requires everything from audits to amended returns, which can be time consuming and costly.?

Instead, businesses with remote and/or hybrid employees need to take a proactive approach to payroll tax compliance. Payroll administrators need to understand everything involved with registering as an employer in all applicable states and counties where work is performed on the company’s behalf. To do this, most companies need to establish a payroll-related practice specific to taxation. This often takes the form of contracting with a third-party payroll administrator, which typically includes a technological platform intended to simplify input and reporting. Yet systems of record are only as reliable as the data the user’s input. Updates are not uncommon for events such as sales commissions, benefits changes and deductions, or bonuses. What is updated much less often is the location of where that work is being performed by individual employees.?

The good news is that doing due diligence to enter where and how work is being performed with a third-party system can often automate reporting. These platforms are designed to provide a number of key services, not the least of which is to ensure that the appropriate taxes are taken out of checks and then paying those taxes to the state department of revenue services as applicable. However, companies that do not realize they need to input this data in the first place or regularly audit their employees to ensure the data they submit is accurate can find themselves quickly falling out of compliance.??

When talking about compliance, there is typically also talk about consequences. The business impact of non-compliance can be severe. More and more in 2023, employees are realizing it is to their own tax benefit to be taxed based on where they are performing their work and finding that their employers have not been accurately reporting and paying out taxes as needed. This can result in poor rapport with employees who may find that, in some cases, they owe more than was deducted from their paychecks due to non-compliant reporting. What’s more, companies can also be subject to penalties and fines as states and even counties lay proper claim to taxes that went unpaid. The process of amending tax returns and the trickle-down effect that this can have on internal processes, can be costly and create paperwork and logistics nightmares.??

Successful companies are more than just payroll tax compliant. They create procedures and processes that help them remain efficient and effective business administrators. This establishes safeguards when it comes to compliance and operations that cultivate strong relationships with their employees while also preventing avoidable errors that can create headaches in the future. By working with an HR consulting firm, companies can also head off problems before they arise. Consider that many companies don’t realize the potential for non-compliance until they actually become non-compliant on a particular issue. Instead, working with a firm that is well-versed in all of the potential pitfalls that can befall a company can prevent issues from occurring in the first place.?

Originally posted here.