Working remotely during the pandemic may become routine, as both companies and workers come to appreciate the convenience and savings available. Companies in major cities are making plans to downsize their workspace, while many employees find they prefer the convenience of working from home. Some of the risks involved, such as surprise nexus issues, are obvious — employees that reside in a different state than their business can subject their employer to tax in the state where they perform their work.
But there are also opportunities to save on taxes imposed by local jurisdictions on the business entity, according to Nishant Mittal, senior vice president of Topia, which specializes in helping companies manage employees in a “distributed workforce.”
A number of local jurisdictions — and the list is growing — impose local taxes on business entities, he indicated. “In some cases, such as New York City, the tax applies to unincorporated businesses. This would include partnerships, LLCs and sole proprietorships,” he said. “It would apply to a myriad of accounting firms, hedge funds and law firms that are not structured as corporations.”
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,” said Mittal. “It can be quite a substantial savings for businesses that make a lot of money. Large companies can save millions in taxes.”
Other jurisdictions such as the District of Columbia, Philadelphia, San Francisco and Seattle all impose these types of taxes. “This is an ongoing conversation,” he said. “Other jurisdictions are considering this, since they are under increasing pressure to find alternative means of raising revenue. And states will be increasingly unable or unwilling to come to their aid,” he predicted.
“San Francisco has three different taxes that come together — a gross receipts tax, a homelessness tax, and a payroll expense tax. These are applied to incorporated businesses as well as unincorporated businesses,” Mittal said. “The tax rate depends on the industry category of the business.”
As an example of the magnitude of the savings possible, Mittal posited a large technology corporation with $3 billion in revenue that has 5,000 employees worldwide. “About 1,000 of them work from the San Francisco office,” he said. “If half of them work remotely, they can save $2.5 to $5 million in tax. These are meaningful savings, if the company realizes it.”
“Companies need to take advantage of this if they otherwise qualify,” he said. “But we advise companies thinking about this opportunity 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,” Mittal said. “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.”
