State Tax and Withholding Consequences of Remote Work
Date: March 28, 2022
Prior to COVID-19, certain state tax credits or reciprocity provisions were already in place to account for individuals working in one state while residing in a neighboring state, while multi-state businesses “apportion” their income among the states in which they do business based on apportionment methods that vary from state to state. Additionally, states through formal or informal policies allowed for varying amounts of de minimis work within the state from nonresident workers without triggering tax consequences. However, the shift to remote work opens the possibility of employees working beyond those geographic boundaries for longer periods of time, thereby creating potential tax consequences in states employers previously had little to no contact with.
Taxes in the Employee’s Place of Work; Where Employers are Subject to Tax
Employers must take measures to identify where their employees are working and residing in order to make sure they properly allocate compensation and comply with any income tax reporting and employer withholding requirements in each jurisdiction. Most preferably, accounting for employees’ work locations can be done through open and periodic communication between the employer and employees, though employers can also use digital indicators (IP addresses, payroll software, etc.) to keep track of where their employees are performing workBusinesses have noted the ongoing issue of employees not self-identifying their work locations. To remedy this problem, employers can encourage employees to be upfront about their remote work, making sure to affirm that such information is required simply for tax and compliance reasons—rather than as an indirect way to discourage employees from working remotely. Other considerations, such as employee benefits or the requirements for a business to register or qualify in order to legally transact business in a given state, may also become relevant with employees working remotely in various states, thereby warranting careful examination of employees’ work locations.
The “Convenience of the Employer” Rule
States that temporarily changed their tax and withholding rules have already lifted such policies, as other COVID restrictions and policies are in the process of being lifted. There is a broader discussion to be had of how states might rethink their traditional approaches to taxing (i.e., determining whether “nexus” or jurisdiction to tax exists based on the presence in the state of remote workers) and allocating or apportioning income, in the face of the enduring change in the nature and prevalence of remote work. However, it is unlikely that states will permanently amend their laws in the immediate future to account for this boom in remote work, which could create tax-related issues for both employers and employees.For example, New York, among certain others states, uses the “convenience of the employer” rule, whereby it only allows allocation of income to another state with respect to a nonresident employee if that employee works in that state for the convenience of the employer, not the employee. With the substantial increase of remote, out-of-state work, continued application of this rule has foreseeable problems, such as determining whether any given case of remote work in this new landscape of remote vs. in-person working is necessary for the employer, especially in light of the initial mandates requiring at-home work.
Conflicting State Rules
Additionally, conflicts could arise between two states claiming the same income from a remote employee. Indeed, this issue arose in New Hampshire v. Massachusetts, when New Hampshire sued Massachusetts over its emergency rule requiring employers to source employee wages to the employee’s place of work before the pandemic, having the effect of Massachusetts claiming that the income of employees whose place of employment was in Massachusetts but who were physically working in New Hampshire was earned in, and therefore taxable in, Massachusetts. The U.S. Supreme Court denied it had original jurisdiction to hear the matter, so the issue will likely continue to be litigated in the years to come.In the meantime, employers must learn to adapt to the switch to remote work while the legal framework lags behind. As a result, employers must pay close attention to and comply with states’ withholding rules, while staying up-to-date on any legal developments in the courts and elsewhere with respect to resolving differing rules among states.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.