The following is a contributed piece from Steve Black, co-founder and chief strategy officer of talent mobility software company Topia. Opinions expressed are author's own.
Before COVID-19, business travel was a compliance headache for CFOs. Documenting the whereabouts of road warriors and calculating the tax implications could be labor-intensive. Now, thanks to ubiquitous remote work, every employee has the potential compliance risk of a business traveler. And, new data shows, remote work is the tax compliance mess CFOs feared.
Since COVID-19 arrived, 28% of employees say they have worked outside their home state or country, but only one-third reported all those days to HR. If your CEO and CHRO embraced a “work from anywhere” policy, the odds are excellent that you failed to withhold payroll taxes in line with regulations. That is the key finding of the “Adapt” survey, the latest iteration of an annual study conducted by my company, Topia.
In years prior, many CFOs were game to roll the dice on remote work compliance. Now, however, tax authorities are suffering revenue shortfalls. They know that remote work is a vulnerability for enterprises and therefore an opportunity for auditors.
For 2021, California is projecting a $26 to $32.2 billion decline in tax revenue compared to pre-COVID, and New York is expecting a $13.3 billion shortfall. Corporate audits could produce a high return on investment for those states. Meanwhile, Massachusetts wants to tax New Hampshire residents who, until COVID-19, commuted into the Bay State to work. We’ll see what the US Supreme Court has to say about it.
Remote work was supposed to be a stopgap response to a temporary pandemic. Now, telecommuting is not just a norm, but an expectation among employees. For reasons my team uncovered in the Adapt study, it doesn’t need to be the compliance disaster CFOs feared. Instead, freedom of mobility may become a minor compliance challenge and a massive advantage in attracting and retaining talent.
Remote work is a requirement
Let’s begin with some context. Between December 11, 2020 and January 12, 2021, CITE Research surveyed 1,250 employees on behalf of Topia. Half were located in the US, half in the UK, and all worked for international companies with at least 2,500 employees (i.e., “enterprises”). 250 of our participants were HR professionals. 91% of all employees agree that they should be able to work from wherever they want as long as they get their work done.
That throws a wrench in two decades of corporate culture. Until COVID-19, employers competed to build multimillion-dollar campuses featuring gourmet food, onsite exercises classes, dry cleaning, free massage, nap pods, etc. Employees are now saying thanks but forget all that—just let us work from wherever we choose. We’ll entertain and parent ourselves.
In fact, freedom of mobility has become so important that employees rank remote work as the second most important trait in an employer—behind high pay but ahead of both professional development and culture. Interestingly, HR professionals back them up, despite having invented the many office perks I mentioned. 94% believe that increased remote work would enable them to build more diverse teams.
Remote work is not a temporary policy run amok into a permanent entitlement seemingly designed to make tax compliance hell. Rather, CFOs need to view remote work as a competitive requirement in a fierce talent marketplace.
Do as HR says, not as HR does
Enthusiasm for remote work, both among employees and HR leaders, doesn’t make the compliance issues magically disappear. I led with the fact that 28% of employees worked across tax jurisdictions, but only one-third reported all the days. This would be a problem if HR knew it was going on. It’s an even bigger problem because most HR teams don’t think it’s going on.
In the Adapt survey, 78% of HR professionals are confident their employees self-report when working in another state or country. In reality, only 33% of employees claim to report all those days, even though 61% are aware of the tax implications. About a quarter report none of those days at all.
Remembering to self-report can be a struggle. More importantly, employees from expensive cities like San Francisco and New York know—or fear—that if they move to a lower-cost city, HR may down-adjust their salary to the local market rate. If your housing costs are one-third of what they were in the big city, it’s awfully nice to pocket the difference.
HR professionals deserve a special mention here. Presumably, they all know about the compliance risks of working across tax jurisdictions. Yet, HR pros were more likely than average to have worked outside their state or country, and only 46% claim to have reported all those days. The same HR pros who believe they know where everyone has been working don’t even report their own days!
CFOs may chuckle at HR’s expense, but that’s cold comfort when auditors come knocking about remote work and force you to spend a small fortune on legal fees and fines.
94% of employees in the Adapt survey say they are comfortable with an employer tracking their location at the country, state, and city level—plenty of detail to comply with payroll withholdings and immigration risks and establish an audit trail. 81% would even be comfortable with location tracking down to the street level (which is unnecessary for compliance purposes).
This data might surprise you given the privacy hoopla around Silicon Valley tech companies. Here’s the thing: people wittingly (and unwittingly) give apps and websites permission to track their location all the time. Often, they extract value in exchange—better news suggestions and more accurate weather reporting, for instance. People reserve their mistrust for companies that use personal data to manipulate their thoughts, purchases, and actions.
In contrast, when an employer says hey, we need to know your general location to comply with taxes, employees don’t even shrug. Compared to 24/7 surveillance by profiteering tech companies, a widget on a business laptop that documents work locations is innocent. It feels more like location “sharing” than “tracking” with its Big Brother connotations.
To roll the dice or not
The Adapt data illustrates why a remote work tax reckoning is on the way, and why rolling the dice on compliance isn’t logical. Employees expect the right to work remotely and will choose employers who embrace freedom of mobility. In exchange, employers can ask to know where employees worked for compliance purposes. The few who’d rather not share their location automatically can submit it manually. That’s a fair trade, and one that enables a CFO to protect their company without limiting its competitiveness in the talent marketplace.