Remote Work Causes Tax Issues for Both Workers and Employers  

As employers evaluate whether remote-work arrangements are a viable long term option, they should consider that these seemingly innocuous arrangements can trigger tax issues for both workers and their employers, according to an expert from Rice University’s Baker Institute for Public Policy.

“Although the pandemic and the resulting telecommuting arrangements will not have the same effect on all jobs, there is no doubt that the overall workforce will be increasingly mobile and not tied to a specific jurisdiction,” wrote Joyce Beebe, fellow in public finance at the Baker Institute. “State tax and regulatory issues, home office reimbursement for employees and workplace benefits are great starting points to engage in tax policy dialogues for tomorrow’s workforce and the future of work.”

Employees may consider working from home one of their most desirable job benefits, and companies could view telecommuting as a way of saving costs and reducing employee turnover, according to Beebe. She notes it was recently estimated that about 40% of jobs can be performed remotely, though these tend to be higher-paid, professional, service-related positions.

The brief, which is the first in a two-part series, argues that if remote employees cannot claim deductions on home office items like self-employed workers, the employers could initiate the tax benefits.

“Some observers state that employers can still reimburse employees for home office associated expenses under Section 139 of the Internal Revenue Code, which allows reimbursement for reasonable and necessary personal, family, living or funeral expenses as a result of an eligible disaster,” Beebe wrote. “Under this provision, expenses— including utility costs and computer and equipment costs—may all qualify for reimbursement. These expenses are essentially exempt from tax, as they are not included as a part of employees’ federal gross income and, at the same time, are deductible by the company.”

Working parents have been able to use dependent care flexible spending accounts (FSAs) provided by employers. But the pandemic has shuttered many daycares, camps and after-school programs – causing concern that the unused money in the FSAs would be lost.

“In response, the IRS provided relief in May to allow more flexibility for FSA programs if employers opt in to allow these changes. These include extended periods for claiming qualifying expenses, the option for midyear changes to elected amounts, and the option for multiple modifications,” wrote Beebe. “Similar flexibility is also permitted for employer-sponsored health care FSAs, an even more popular program used by more than 22 million workers.”

Although employers and workers were suddenly forced into remote work settings early this year due to the COVID-19 pandemic, it has “provided an unexpected opportunity for states to expedite the discussion about how best to tax an increasingly mobile workforce,” Beebe argues.