As the current work environment continues to evolve, employers are seeking out additional information on the ability to work remotely and what tax impact that has on the business and its employees.
Employers should begin by considering a few questions:
- In which state(s) do we have employees doing work at a company facility or in a home office?
- In which state(s) are we registered to do business for income tax, withholding tax or sales tax purposes?
Whether in an informal or detailed format, your responses should be clearly documented. This information will allow management to conduct a full risk analysis to determine if there is any tax exposure and how those risks should be addressed.
In most situations, the physical presence of an employee in a particular state is enough to create nexus, meaning a connection to that state, which may necessitate tax filings. Various states have provided some relief for employees temporarily working in another state given Covid-19, with the intent to return to the normal work location at some point. Those various state relief measures are set to expire at varying dates.
Some states follow the convenience rule, which says that any days worked in another state will only be considered actual days worked in that separate state if “it is for the convenience of the employer” and not the employee. There are five states that follow the convenience rule: New York, Connecticut, Pennsylvania, Delaware and Nebraska.
Other states have adopted reciprocal personal income tax agreements with one or more states, including the District of Columbia, that allow income to be taxed in the state of residence, even though it is earned in another state, as long as the income-source state is a party to the reciprocity agreement.
One final item to consider is state unemployment taxes, which may not line up with the states of withholding in all cases. The rules for state unemployment tax are based on localization, base of operations, control, and then residency.