Sustaining this level of flexibility will require transformation of people, processes, and infrastructure to support, and even enhance the employee experience, engagement, and productivity expectation. The remote workforce looks like it is here to stay. It is critical that companies determine governance, policies, and effective management of their telework employees.
Maintaining Work Location – The Taxation Dilemma
Remote workers pose unique challenges. For example, how does the company make sure remote workers are remaining in the work location state that they were hired in? How does the company track employee movements once remote work is a permanent placement? Does any employer put restrictions on employee movement once going remote?
As the trend of long-term remote work continues to grow, many states and localities continue to issue guidance regarding the income tax treatment of teleworking employees and business tax nexus policies. However, several controversial policies have invited lawsuits as the states continue to understand the long-term effects of a remote workforce.
Recent state income tax withholding guidance and litigation
Since the beginning of the pandemic, many employees have been required to work from home or other remote locations due to the issuance of state and local emergency declarations or stay-at-home orders. In the case of employees who regularly commuted across state borders to work at an office, employers may have been required to withhold state personal income tax based on the employee’s home location instead of the office. This may require employers to register for payroll taxes in additional states. While guidance from the states regarding the treatment of this issue has become less frequent in recent months, it is apparent that states are taking different approaches to the enforcement of tax obligations on remote workers.
Many states have issued specific guidance over the last several months addressing the income tax withholding treatment of remote employees. States such as Maine, Georgia, and Pennsylvania have indicated that employer state income tax withholding requirements will not change during the time that employees are working remotely. In other words, wages paid to nonresident employees normally working in one state before the pandemic are considered income earned in that state and are thus subject to tax withholding. Conversely, these states have indicated that if an employee normally works in another state and is temporarily working in their resident state due to the pandemic, wages earned during this period would not be subject to tax withholding in the resident state.
Massachusetts finalized a regulation addressing the sourcing of income for nonresidents working remotely during the pandemic. Breaking with previous guidance, the regulation provides that wages received for services performed by a remote nonresident who worked in Massachusetts prior to the COVID-19 state of emergency declaration, and who is working outside the state due to the pandemic, will continue to be treated as Massachusetts source income subject to personal income tax. The rule clarifies that nonresident workers who were remote before the onset of the pandemic may allocate income to the state according to either:
(i) the percentage of workdays in Massachusetts from January 1 through February 29, 2020; or (ii) an apportionment percentage arrived at based on the employee’s 2019 income tax return. The regulation applies to the sourcing of wage income from March 10, 2020, through the later of Dec. 31, 2020, or 90 days after the governor ends the COVID-19 state of emergency.
New York state clarified its position on the wages for New York nonresidents working outside the state for the duration of the pandemic. Specifically, the guidance states that for nonresidents whose primary office is in the state of New York, days spent remotely during the pandemic are considered days worked in the state unless the employer has established a bona fide employer office at the nonresident’s remote location i.e., employer has an office in the remote worker’s resident state. The guidance aligns with New York’s regulation of its “convenience of the employer” rule, under which a nonresident employee is subject to New York personal income tax on income earned when the employee works from a nonresident location at the employee’s convenience, rather than as a requirement of the employer.
Similar issues arise with respect to the taxation of income for local earned income tax purposes, which matters in states that have significant levels of municipal income taxation. For example, Ohio enacted legislation in March providing various tax relief measures in response to the pandemic. Other states with local earned income taxes, including Pennsylvania, have yet to issue specific guidance addressing remote workers during the pandemic.
Nexus and Remote Workers
The term “nexus” is used to describe a situation in which a business has a tax presence in a particular state. A nexus is basically a connection between the taxing authority and an entity that must collect or pay the tax. Employers have also been faced with the challenges of potential additional business tax filing obligations because of employees working remotely from locations in which the employer does not otherwise have a physical presence or other nexus. In response, approximately one-third of the states have issued guidance providing for the temporary suspension of corporation income tax and/or sales and use tax nexus thresholds where the pandemic has forced certain employees to work remotely in a state in which the company would otherwise not have nexus. States such as Massachusetts and South Carolina specifically announced that their nexus waivers would last through Dec. 31, 2020, while Pennsylvania recently updated its teleworking guidance to extend nexus relief through the earlier of June 30, 2021, or 90 days after the governor’s state of emergency proclamation is lifted. Other states, including California, have not provided a specific end date to their temporary guidance, explaining that the waivers will remain in effect for the duration of the states’ emergency declarations or stay-at-home orders.
Proposed Federal Legislation
Since the beginning of the pandemic in March, Congress has introduced several bills in attempts to provide uniformity in addressing the state income taxation of interstate remote workers. The Multi-State Worker Tax Fairness Act of 2020 proposes that remote workers should only be taxed by their state of residence on the income earned while working remotely. The legislation advances a rule that a state may tax a nonresident individual on their compensation only if the income is earned due to the nonresident’s physical presence in the taxing state.
The Remote and Mobile Worker Relief Act was originally part of the U.S. Senate’s COVID-19 relief bill introduced in June 2020. The legislation, which has been considered by Congress numerous times for more than a decade, imposes a single, national standard for traveling employees liable for nonresident income taxes. The current version of this bill is updated to provide special relief during the pandemic. Specifically, the bill establishes a 90-day threshold for working in a particular jurisdiction before a remote worker may become subject to tax in a nonresident jurisdiction during 2020, while switching back to a 30-day threshold for the 2021-2024 calendar years. The legislation also clarifies that remote work due to the pandemic cannot be sufficient to establish a taxable nexus for the employer. Neither of these bills have gained much traction to date.
Although the concept of remote work is not a new issue regarding state and local tax, the COVID-19 pandemic has made the taxation of remote workers a hot topic.
The prolonged effect of the public health crisis raises the question of how long the states will continue to adhere to temporary “status quo” tax withholding policies or business tax nexus waivers, even after state emergency declarations or stay-at-home orders are lifted. Given the fact that many states continue to face substantial budget deficits for the 2021 fiscal year because of an uncertain economic environment, they are looking for ways to maintain revenue collections, including from nonresident employees who remain an important source of revenue for states such as New York. For jurisdictions following the “convenience of the employer” standard, extensive remote work has challenged the application of such rules during a pandemic, raising the question of whether these states may legally tax the income of nonresidents who are working remotely on a permanent basis.
Employers should pay close attention to tracking employee locations for payroll tax withholding and business tax purposes, given that the state in which an employee is working during the pandemic may not be consistent with the employee’s primary work location. Depending on the facts and circumstances, there may be additional payroll tax withholding and business tax filing obligations based on an employee’s new remote work location. Employers may also need to consider other payroll implications such as unemployment insurance withholding, worker’s compensation, and disability.
At the same time, employees may not be aware of the state and local tax consequences of working remotely in a different state, including the potential for compensation to be taxed at different rates. Additionally, individuals working outside their state of domicile beyond a period of six months may unintentionally become a statutory resident of the second state under that state’s tax residency rules. Such dual residents who become subject to personal income tax by two states should consider the implications of potential double taxation on wages.
In the short term, employers should closely monitor state and local guidance issued on remote working, as it continues to change rapidly. In the long-term, however, the shift to remote work should give employers plenty to think about in terms of their state income tax withholding and other business tax policies and procedures, given the different and often conflicting approaches taken by the states.