Will Remote Work Break Our Tax System?
Tax credits, double taxation, and the scourge of corporeal location
This tax year will perhaps be the most difficult in modern history. Not only are governments struggling with offering relief due to COVID, another question emerges: what the heck are companies supposed to do about remote workers?
Tax analysts, like Andrew Wilford from Real Clear Markets, warn of many scary-sounding phrases that would send shivers down an accountant’s spine:
Uneven distribution of tax credits
Expense deductions for remote workers
It’s a lot of ten-dollar words (and it’s starting to feel like tax bills are just calculated based on counting how many ten-dollar words are used in the analysis).
Before diving too far in, I want to be very clear: I am not debating the worthiness, rate, or distribution of taxes. I am not qualified to do any of those things.
Instead, I’m just here to chat about the interesting things that apply to remote workers.
Let’s talk double taxation
As Wilford brought up in his Real Clear Markets article, there is significant risk of double-taxation for people. He spoke only about Americans, but the threat applies in parts of Canada and Europe as well.
Basically, Wilford says that the state tax system in the US (as opposed to federal) charges taxes based on where work is produced. If you work in Michigan, for a Michigan-based company, but live in Indiana, for example, then you’d pay state taxes in Michigan (for people who don’t know American geography, Indiana and Michigan share a border).
This gets messy when remote work is brought in.
If someone is employed by a Michigan company and produces work for that company, but works remotely from their home in Indiana, which state levies income tax? One could argue it’s Indiana, because that’s where the work was actually done. But there’s room to argue that it should be Michigan, since that’s where the work was ordered from and where the output goes to.
The debate - whether to tax in one state or another - could actually end with both states making claims on the income tax. Since many states are struggling financially due to the pandemic, they are not likely to be gracious about giving the tax dollars to someone else.
This kind of thing could also apply in Atlantic Canada, where you could live in New Brunswick but work in Nova Scotia, for example. Same in Europe, where you could live in Belgium but work in France. As soon as you add remote work to the mix, things can get messy.
My take: this whole thing would be cleared up by making the rules clearer. If the law is that taxes are levied based on the physical location of the worker, that’s easy to judge. If it’s based on the location of the employer, that’s also easy to judge. In most cases, it's the location of the worker, but then you get into inter-state debates and that’s a whole other can of worms.
What’s in a tax credit?
In an effort to help people, governments are starting to offer tax credits in various forms. But, like many government programs, it’s complicated. It opens the question of if a company should be forced to pay for an employee’s at home work set up (which it seems like might be the case in Russia) or if the employee should have to pay their own way but then get a tax credit for it.
If you’re looking for a good example to emulate, governments, take a gander at Ireland’s national remote work strategy. In the plan, it grants tax credits to companies that pay for an employee’s home office set up. If companies don’t provide for that, then the tax credit is automatically applied to employees so they are not in the hole if their company doesn’t have the budget to buy everyone at-home set ups.
My take: Follow Ireland’s way of doing it, honestly. It’s clean and simple. Companies can provide their employees with at-home set ups just like they did in an office building and get a deduction. But if you’re dealing with a company that can’t or won’t provide it, employees get the tax break. Seems logical and simple to me.
Expenses and deductions
While freelancers the world over have been handling expense deductions for home offices for years, it’s apparently a huge issue for remote workers.
Is that lunch really a business lunch if you didn’t eat it beside the office and spend too much money? Did you buy a desk for work, or for your new desk-collecting hobby?
Jokes aside - and I could continue with the question-based puns if anyone wants - there are a few questions to ask about expenses. Normally, the physical separation of home and work makes it very easy for companies and employees to write off expenses as a tax deduction. However, with remote work the line gets muddy.
My take: I’m just going to share my accountant’s advice (note: this is not official tax advice and you should consult your own tax professionals for your specific circumstances): use the rule of thumb that if you would not have spent the money if you didn’t have your business and/or your work, then it’s deductible.
Thanks for reading!
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