Remote workers may provide tax savings for employers

Ferrone & Associates CPAsBlog

Working remotely during the pandemic may become routine, as both companies and workers come to appreciate the convenience and savings available. 

There are also many opportunities to save on taxes imposed by local jurisdictions on the business entity. A number of local jurisdictions — and the list is growing — impose local taxes on business entities. In some cases, such as New York City, the tax applies to unincorporated businesses. This would include partnerships, LLCs, and sole proprietorships.

With an unincorporated business tax rate of 4 percent, the amount of the tax is significant. The tax rate “is charged to income allocated to New York City,” meaning that income is not allocated to a business for employees working from a location outside of New York City. You can take away that portion of the work that is not performed in New York City and you don’t have to pay the 4 percent. It can be quite a substantial savings for businesses that make a lot of money. Large companies can save millions in taxes.

This is an ongoing conversation, other jurisdictions are considering this since they are under increasing pressure to find alternative means of raising revenue.

Companies need to take advantage of this if they qualify. Companies thinking about this opportunity should know that all tax jurisdictions are going to be aggressive. States, counties, and cities all have significant deficits, so states are unlikely to assist the local jurisdictions since they have their own issues.

Since local budgets won’t get fixed anytime soon, expect to be audited. To successfully fight the audit, a business should be prepared to prove who is working, from where, and for how long. The burden of proof falls on the taxpayer, so if the local jurisdiction audits the taxpayer, the onus will be on the firm to provide clear and convincing evidence about the position it has taken. But given the amount of tax savings involved, the effort is worth it.

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