FAQs – State-Level Teleworker Tax Issues
Introduction
In response to the COVID-19 outbreak, tax authorities from several jurisdictions, including the District of Columbia, Mississippi, New Jersey, and Pennsylvania have either issued notice relaxing rules or have expressed their intention to relax tax rules implicated by employees working from home in a state outside of the location of their employers. While statements of intention made by state tax authorities on this topic do not carry the full force of a law, these statements may indicate the position that states will take in upcoming legislation and audit practices.
Employers whose employees are working remotely as a result of the current COVID-19 outbreak should consult with their tax professionals to determine the rules applied by the state of each employee’s customary work location as well as the state where telecommuting employees are located, if different. Although the determination of nexus application is not pressing, payroll taxes are generally required to be remitted on a monthly or more frequent basis. Employers may be required to register as employers for payroll tax purposes and establish payroll tax accounts in states where they are currently not registered.
I am an employer. My employees are working temporarily from their out-of-state personal residences. Will this create taxable nexus such that my business will be subject to income tax in that other state?
The answer depends on the state. Under conventional state nexus statutes, work performed by employees of a business in another state could subject that business to income tax in that other state. However, responding to the emergency nature of telecommuting arising by reason of the COVID-19 outbreak, several state tax authorities have announced that employees’ temporary performance of work in other states by reason of the COVID-19 outbreak would not subject businesses to income tax in those other states.
I am an employee. Will my income be sourced to the state of my employer’s location or the other state where I am temporarily performing work?
Except in a state that applies the “convenience of the employer” rule under conventional state income sourcing rules, wage income is sourced to the state where the work is performed. [i] If the employee’s wages are sourced to the employer’s state under its convenience of the employer rule and to the residence state under the location of performance rule, an employee can be subject to tax in both states without an offsetting state tax credit. Several state tax authorities have waived sourcing an employee’s income to the employee’s telecommuting location during the temporary period of the COVID-19 pandemic and will continue to source wage income to the state of the employee’s regular work location. In addition, some bordering states agree not to tax residents of the other state, even where residents of the other state are performing work within its own border. [ii] Pursuant to those reciprocity agreements, the employee’s income will continue to be sourced to the state of residence and not to the state of the employee’s regular work location.
I am an employer. Will I be required to withhold and remit payroll taxes to the states from which my employees are performing work?
Under conventional state payroll tax statutes, state-level payroll taxes are withheld and remitted to the state to which wage income is sourced. As discussed in endnote i, when employees telecommute, depending on the laws of the states of the employer’s and the telecommuter’s location, both states may claim jurisdiction to tax and require remittance of local payroll taxes. Several state tax authorities have relaxed or indicated intention to relax these rules during the temporary period of the COVID-19 outbreak and continue to source wage income of telecommuters to the state of the employer’s location, regardless of where work is performed.
[i] Some states adopt a rule that provides that, if the employer provides a work location for the employee in the state of the employer’s location or the employee is only working remotely for the convenience of the employee, the income will be sourced to the state of the employer’s location. Under certain circumstances, this can result in the income being sourced to two states.
[ii] See the following chart for states that have entered into reciprocal agreements.