COVID-19 Induced Telecommuting May Have Tax Implications

Telecommuting arrangements that result in employees working in a state other than their normal place of work create significant uncertainty for employers related to tax compliance.

During the pandemic, some employees who work in one state and live in another have been telecommuting from home or from another state to comply with stay-at-home orders. This could potentially trigger tax nexus for businesses in the state from which the employee is working, creating new tax and withholding obligations.

Businesses like sellers of goods with sales in states where they have no other physical presence apart from soliciting sales may be impacted. Remote employees can also change a business’s corporate income tax apportionment in states that use payroll as an apportionment factor.

While some states have provided waivers and guidance regarding the tax implications of such working situations, uncertainty about how other states will respond remains. To date, those states that have issued waivers or guidance include Alabama, the District of Columbia, Georgia, Indiana, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania, and South Carolina.

This tax issue also shines a light on the complex multistate withholding system. States’ rules for when companies must withhold taxes for employees working outside of their jurisdiction vary. Other complicating factors include reciprocity agreements between certain states and employer convenience rules. Alabama, Georgia, Massachusetts, Maryland, Mississippi, Nebraska, New Jersey, Pennsylvania, Rhode Island, and South Carolina have issued guidance on the withholding issue. Illinois is forgiving interest and penalties for out-of-state employers who fail to withhold for employees working in the state because of COVID-19.

Telecommuting employees can also face withholding obligations in localities with their own income tax. However, Ohio recently passed legislation establishing that the days spent telecommuting in the state’s locality during the pandemic won’t count toward the state’s 20-day threshold for withholding local income tax.

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How This Impacts Mobility

Establishment of a tax nexus alters business’s obligations. Additionally, employers can face penalties and interest for failing to withhold for employees. Employees can also face increased tax obligations. It’s important for states to issue guidance as to how they plan to treat temporary telecommuting arrangements triggered by the COVID-19 pandemic, and for Worldwide ERC® members to monitor these issues proactively to insure they comply wherever they have employees working remotely

Worldwide ERC® continues to advocate for limitations and simplifications of states’ taxation of non-resident workers, including enactment of the Mobile Workforce State Income Tax Simplification Act (H.R. 5674) which is supported by Worldwide ERC®.

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