As more states are extending their COVID-19 shelter-at-home orders into the summer months, businesses may be operating remotely longer. The logistics of allowing employees to work from home can be difficult, given the increased demand on IT infrastructures alone, but complying with state and local tax laws will also be a challenge.
Income and Sales Tax Considerations
If your employees are forced to work from locations other than the locations where they typically work, even temporarily, your business will likely generate nexus in those states. “Nexus,” or the sufficient connection you have with a state before you become subject to its taxing laws, is almost always triggered by physical presence. Even employers with remote employees that previously had the protection of P.L. 86-272 may no longer qualify for that protection, if remote employees now engage in unprotected activities. State nexus laws have become more aggressive (especially since the South Dakota v. Wayfair Supreme Court case of 2018), making it unlikely that an organization with physical presence will be exempt from state or local income tax. Further, employees working from home may impact the employer’s state income tax computation (particularly in states that still apportion income to the state using a payroll factor).
Jurisdictions that impose a personal income tax on employee wages typically require employers to withhold tax from wages earned by an employee that either resides in the jurisdiction or performs services in the jurisdiction. Employees that now telecommute from a location other than the one in which they typically work may cause employers to have a withholding obligation where they previously didn’t have one.
State payroll and income taxes are overseen by different departments, so check with the state’s Department of Labor to fully understand your payroll obligations if you have remote workers. You will likely need to do two things: Take note of when your employees began working remotely and the city/state where they have been working. (Note that some localities also impose income or business licenses taxes). If any of your employees have been working out-of-state, mention your nexus concerns to your tax advisor so they can help you determine next steps, such as:
- Filing payroll tax returns in any new states/local jurisdictions (to report state-specific items like unemployment taxes and disability insurance, and head taxes), and
- Withholding income taxes from your employees working in those new jurisdictions.
Some states have reciprocal agreements that alleviate tax burdens on employees and lessen filing requirements for employers. If reciprocity exists, an employee can elect to be exempt from taxes in the state where they work and instead only pay taxes in the state they reside.
Payroll taxes have notoriously high penalty and interest rates, so act quickly. Your tax advisor can help you set up new payroll reports in your time clock system and apply for payroll licenses in other states if needed.
Rules Might be Changing for COVID-19
Just as the federal income tax payment and filing deadline were pushed back due to the COVID-19 pandemic, many states delayed their state income tax filing and payment deadlines to July. However non-income state tax obligations, such as withholding, may not have changed, so it is important to note the states in which you may have obligations so you can plan accordingly.
Some states have also opted to waive certain nexus requirements for telecommuters during the COVID-19 crisis. The District of Columbia and Pennsylvania taxing authorities will not consider telecommuting employees as meeting the threshold for local and state tax obligations. New Jersey has announced that it, too, will not count workers being asked to work at home as having nexus in the state during the pandemic.
Remote workers may create income tax nexus, apportionment, and payroll tax implications. Taxing authorities typically look for recordkeeping to track which employers are working from home versus coming into the office, but given all that’s going on during the COVID-19 pandemic, many states are offering relief to this level of recordkeeping. It is going to be very difficult for employers to track new state and local tax obligations that might arise during the remote work situation. Working with a state and local tax advisor may help with monitoring the various extensions and relief measures available for 2019 and 2020 taxes.
You can also visit our COVID-19 Resource Center for up-to-date information on the pandemic repercussions that may affect your business.
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