The COVID-19 pandemic has changed the way employers do business. Many employees work on a fully remote or hybrid basis, and this will likely continue. While the concept of remote work is not new, COVID-19 has amplified state tax and business consequences of these arrangements. Remote work has become a burdensome State and Local Tax (“SALT”) issue for both businesses and individuals. Some, not all states, have provided tax guidance for telework. How does remote work impact businesses and employees? Many would be surprised, but it could create unintended tax consequences such as income, franchise, or sales tax.
Generally, individual income tax is based on where a person is physically located when earning the income. The state in which the person resides may also tax the same wages. This can sometimes lead to double withholding and even double taxation. However, most states allow residents a credit on the income tax return for taxes paid to a non-resident state. But what if the tax rates are not the same? This could result in a disparity of income taxes paid.
To further complicate matters, New York follows what is termed a “convenience of the employer rule.” This rule creates an obligation for employees to pay income tax to New York, even though they may have never worked in the state. For example, if the headquarters of Company A is in New York and the employee is retreated to a neighboring state, the employee may be obligated to pay income tax to New York as well as the state they reside in.
Will the presence of an employee working from home create taxable nexus for an employer? It’s quite possible and could mean filing additional business income tax returns and paying more taxes. Depending on the amount and number of sales to the state where the remote employee is working, this could also subject a company to sales tax filings. It is increasingly important for businesses to regularly review the nature and frequency of contact it has with another state. Looking forward, it will be necessary to track both the amount and number of sales as well as the location of employees. The Supreme Court’s ruling in the 2018 South Dakota v. Wayfair may further enforce a state’s argument that a business has physical presence, or nexus, in states where their remote employees live and work from home.
If the headquarters of a business is in one state and the remote employee is working in a different state, to which state should the business remit individual income tax withholding to? Employers are struggling with several different states’ rules, including registering for unemployment insurance, workers’ compensation, etc.
As states look to recover lost revenues over the past year and a half, taxing out of state workers may be an easy way to regain lost tax dollars from people who have moved away. States have indicated audits will be on the rise in cases where income is allocated to part-year resident states. If your business is considering a long-term remote arrangement, tax modeling is recommended to help avoid risk and unexpected surprises.
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