Helping Kansans by Rethinking Taxes Around Remote Work
The COVID-19 pandemic has triggered one of the biggest changes in labor for Kansans in recent history: the rise of remote work. In 2021, about 1 in 4 workers nationwide will be fully working remotely, with many workplaces also adopting hybrid schedules. By 2025, an estimated 36.2 million Americans will be working fully remotely. This issue is particularly relevant in Kansas: thousands of people live on one side of State Line and work on the other. Likewise, the opportunity for remote work is creating new opportunities for rural jobs and population growth.
The issue with remote work is that it could lead to workers potentially be taxed multiple times. Residents of a state are subject to domiciliary taxes, in which all income from all sources is taxed, but with some credits given out for work done in other states. If the resident of one state works in another, they typically only must fill out income taxes based on the income they earned in that state. This is true for Kansas.
This model can very quickly become convoluted and difficult. For instance, what if a member of the military is moving across states rapidly? Or, what if a business has a large number of employees who live and work remotely in a neighboring state? That could potentially lead to many different tax returns an individual would file, which is difficult and could deter somebody from engaging in business across state lines. One solution to this is reciprocity agreements. Let’s say a worker resides in Kansas but works in Missouri. A reciprocity agreement between the two states means that the Missouri employer could withhold income taxes from Kansas, meaning that the worker would only have to pay taxes in Kansas.
Kansas has policies that could deter remote work and are deterring greater interstate work with our neighbors. Kansas requires employer withholding for people working in the state just for one day, which creates an annoying hurdle for companies trying to operate even in a small capacity in Kansas. In 2020, the Kansas legislature considered a bill that would have extended the withholding requirement period to 30 days, but the proposal died
Much of whether a company itself is liable to taxation is through the idea of a tax nexus. A nexus is a taxable entity by the state, typically an out-of-state company working within the state. In Kansas, if 1 to 6 workers for a company telecommute for their out-of-state job, the company could be defined as a tax nexus and thus liable to an income and sales tax. Many different states waived these nexus eligibility conditions to promote remote work, especially during the COVID-19 pandemic. Because of the scale of this rule, it is most likely to affect small businesses with fewer employees and who don’t already count as a tax nexus in the state. The last thing Kansas should do is deter remote work – especially as concerns over COVID-19 have been one of the largest reasons why many haven’t returned to any kind of full-time work.
The dynamic nature of business in Kansas City could make a reciprocity agreement between the two states regarding remote work tax withholding a worthwhile investment to promote greater economic cohesion in the metropolitan area. One thing Kansas should continue to avoid is a convenience rule, which taxes people based on the location of their work office, which in seven states, leads to double taxation.
Removing barriers in the form of convoluted tax laws is a simple way the state of Kansas can promote remote business opportunities. Promoting remote work helps an assortment of people return to normal who wouldn’t normally be able to do so. What’s more, even on the margin, it may make Kansas a more attractive place to live as technological and cultural trends move away from 9-5, brick and mortar work. After four decades of economic stagnation, Kansas families, businesses, and communities need all the help they can get.