Technology is changing the workplace. Twenty years ago, most small businesses required employees to commute to an office for an eight-hour workday. With advances such as cloud computing and high-speed internet, small businesses have more options. In fact, many small businesses are now permitting their employees to work from home via telecommuting.
Background and Payroll Tax Implications for Small Businesses
In 2012, a groundbreaking court case in New Jersey addressed the tax implications for employing people who work from home. TeleBright Corporation was a Delaware corporation with operations in Maryland. TeleBright employed a New Jersey resident to develop software from her own laptop in New Jersey. The employee was performing work that was an integral part of the service provided to the company’s customers, but the company had no other property or payroll located in New Jersey. The state asserted that the employee’s presence in New Jersey gave New Jersey a right to collect corporation business tax on a portion of TeleBright’s net income. The case went all the way to the Supreme Court.
According to the Court, employing a telecommuting worker in New Jersey met the state’s definition of doing business within the state and allowed New Jersey to tax the net income of TeleBright. The Court stated that the employee performed work that was an integral part of TeleBright’s business. Another key fact in the case was that the telecommuting employee was working from home on a full-time basis in New Jersey. As such, the employee was entitled to legal protections provided to its residents, and TeleBright would have the right to file suit to enforce the employment contract in New Jersey courts. These facts led to the Court’s decision that TeleBright had the minimum connection needed to subject the company to New Jersey’s corporation business tax.
The advances in technology over the past few decades have changed the workplace. While there are many benefits to hiring telecommuters, a small business needs to consider the income tax implications of entering into these sorts of work arrangements. The Court’s decision in the TeleBright case illustrates how having employees working from home can lead to unforeseen tax issues. If your company currently employs telecommuters, it would be best that you review those arrangements and consult with your tax advisor.
Telecommuting has its benefits for a company, including convenience for the employee and reduced office space expenses, but there are definitely some items to consider before committing to this policy.
Benefits of Allowing Employees to Work from Home
- Improve morale – Remote employees report having a greater sense of work-life balance and therefore greater job satisfaction.
- Cost savings – Save money on technical equipment, office space, and other overhead costs such as furniture, coffee and beverages, utilities, etc.
- Productivity – Some employees are motivated to be more productive in their home environment instead of confined to a cubicle. It also allows staff to take care of responsibilities or work from home when ill, which therefore results in fewer sick days and absenteeism, typically another cost faced by employers.
- Attractive perk – Employees can take advantage of the flexibility of working from where it’s convenient to them, including taking care of personal responsibilities without taking personal time and saving on childcare expenses. This also saves them the time and money on daily commuting. This can be a rewarding company benefit to retain current staff or when recruiting prospective employees.
Downside of Having Employees Work from Home
- Distractions – Telecommuting parents may be saving on childcare by working from home to watch their children, but it can lead to distractions and lack of focus on the project at hand. Encourage your staff to have a dedicated office space where they can try to be free from distractions. Telecommuters who work out well are often the self-motivators in your office, so they are willing to overcome this complication and still produce quality work.
- Less collaboration – Employees working from home won’t get to be as social with their coworkers and can affect your company’s overall culture. They also need to remember they are part of the team and need to be in constant contact with other team members to avoid workflow obstacles and missteps. Keep in mind that employees who require constant supervision or are still in the training process might need to put in more time in the office before being permitted to work from home so they can still easily work with and learn from others.
- Communication – When you don’t get to see your employees face-to-face, you could face a challenge of staying on top of ongoing updates and communication. This also applies to client communication. If your industry revolves around customer contact and quality service, the priority should always be on responding timely to the customer and still sounding professional without noisy distractions in the background. Great telecommuters have to have excellent, transparent communication skills to keep all involved parties up to date on projects.
- Security concerns – Nowadays, many offices have Bring Your Own Device (BYOD) policies in place, but you also need to take steps to safeguard confidential and sensitive client materials when they’re beyond your office walls. Optimal telecommuting employees are organized and responsible so client paperwork won’t end up in the wrong hands, or a device with sensitive information won’t get misplaced.
You also want to keep in mind that some job roles are more portable and therefore more well-suited for a work-from-home environment than others. Define a custom telecommuting policy that works best for your own organization and your people and get it in writing. A successful policy is clear on its expectations and requirements, but can be flexible and responsive to your employees. Consider running it on a trial basis, perhaps only summer Fridays, and then you can tweak your policy for the better before putting it into full effect.
Telecommuting is not one-size-fits-all, but if your small business is interested in a change of pace or wanting to keep up with technological advances, allowing your employees the flexibility of working from home is something to consider.
To make sure your payroll tax arrangements are all in order, whether your employees are in a single office or many different locations, we can help. Contact Abacus Payroll today at (856) 667-6225 or send us an email.
About the Author: Ren Cicalese III, CPA, MST
Ren is a Manager at Alloy Silverstein with a special interest in advising small businesses and high net worth individuals. He is a member of NJCPA (New Jersey Society of CPAs), AICPA (American Institute of CPAs), and PICPA (Pennsylvania Institute of CPAs). Ren was recently named a “30 Under 30” by the NJCPA and one of the “40 Under 40” by Southern New Jersey Business People. Follow Ren on Twitter at @R3CPA or if you’d like to know more about how Abacus Payroll, Inc. or Alloy Silverstein can help your business, please call us at 856-667-6225 or Email us.