New COVID-19 Related Mobility Situations

August 03, 2020

Last week I read an article about nine countries that are welcoming overseas workers who have been asked to work remotely during the pandemic. Loving travel as much as I do, I immediately started daydreaming about which of these countries I could “work” from, but then the practicalities set in. The article mentioned the visa waivers that these countries give remote workers. However, missing from the article were all the complexities that remote workers create for their employers, such as payroll compliance, taxation, business registration and labor law issues, to name but a few.

Most countries and U.S. states apply taxes based on where an individual lives (is resident) and where they work. If an individual works in a place they are not resident, generally they will pay tax based on the income related to their workdays in the non-resident location. (Special rules apply to public figures, celebrities, and athletes.)

COVID-19 Leads to Mobility Chaos

The COVID-19 pandemic has caused a lot of chaos in many areas that most of us could not have foreseen. One such area is mobile employee tax compliance where companies have suddenly found themselves finding ways to comply with and prepare policies for multi-jurisdictional tax situations that they had not previously envisaged. Three main COVID-19 related mobility scenarios have emerged.

Scenario #1: Employee stayed in a country longer than intended

The first such scenario involves employees who, due to quarantine or shelter-in-place rules, were forced to stay in countries (and sometimes states) for longer than intended. This includes individuals who had left their home country for a business or personal trip and found their return flights were cancelled. Some employees had travelled to renew work or immigration visas only to find that consulates had shut down and they were stuck away from home. Many of these individuals have continued to work remotely from their shelter country for their employer in the home country.

Several tax authorities, including the IRS, have provided some tax relief for individuals in these situations. The IRS, for example, issued Revenue Procedure 2020-20 that allows non-resident taxpayers who meet the specified conditions to ignore up to 60 days of U.S. presence from counting those days toward the substantial presence test (a formula-based test of days spent in the U.S. to determine residency).

Scenario #2: Employee voluntarily decided to work from another state or country

The second example is driven by employee choice. Employees who, having been asked to work remotely, decided to do so from another state or country. Some of these decided to shelter with family or friends in another location. Some, seeing their expensive rental leases coming to an end and not knowing when they would be allowed to work from the office again, decided to move elsewhere until they are required to return to the office.

Others who saw remote working as a long-term possibility decided to move permanently. Most employees in this category will likely create a taxable presence in their shelter location. Depending on the relevant rules, they may or may not break residency in their home locations. Therefore, the company may have withholding obligations for both locations.

Scenario #3: Employees who were supposed to imminently be mobile, but instead stayed where they were at

Ironically, the third scenario arises from a lack of mobility. Many new hires who were due to relocate to their new employment location find themselves working their new job from their old home. Sometimes, they cannot travel due to restrictions and often companies do not want to ask a new hire to resettle if the offices are closed and there is no reason for them to move just yet. These employees are, therefore, working remotely in a state or country that is not their intended employment location.

All three situations may lead to employees working in locations where their employer(s) does not have an entity and is not registered for payroll purposes. These situations can create a lot of issues for the company, including the proper reporting of income, withholding of taxes, visa and immigration issues, a potential corporate presence in locations where the company does not have an entity, labor law issues, etc.

Companies should consider implementing remote work policies

Now is the time for companies to create remote working policies for COVID-19, as well as the longer-term if remote work will be allowed on an ongoing basis. Creating and implementing such a policy should be an integrated project; a lot of stakeholders need to work together to produce a comprehensive policy that addresses the legal aspects (immigration, visas, labor laws), corporate tax, HR (benefits, compensation), payroll and stock departments. The company needs to address the issues holistically.

Furthermore, each remote working situation should be assessed for the employer payroll reporting and tax withholding that may be required. Employees will need to understand that working remotely from another location may lead to tax implications and they need to be prepared to be subject to taxes in multiple locations.

Marlene Zobayan is a partner at Rutlen Associates LLC, a boutique consulting firm helping companies with their global equity plans and / or mobile employees.​