As the world continues to adapt to COVID-19, one of the most noticeable changes on the professional landscape has been the continued growth in remote work. With more people working from home, it is important to be aware of the various tax implications that could arise.
During the onset of the pandemic, several states relaxed their rules about filing state and local tax returns for remote workers. Although most companies still have a hybrid or remote workforce, the tax compliance grace periods have ended, which may create unforeseen state and local tax liabilities for your organization.
This article will address some of the state and local tax compliance issues affecting your remote worker arrangements.
Understanding Your Tax Obligations
Remote work is here to stay. When the world shifted to work-from-home during the lockdown in March 2020, not many organizations considered the tax consequences for remote work because employers believed it to be a temporary phenomenon. However, the conveniences afforded remote workers have made it the “new normal.” Many organizations are now planning to be permanently hybrid or allow fully remote workers.
Unfortunately, this new landscape makes state and local tax compliance incredibly complicated because every state has different tax codes, and throughout the pandemic the rules have been constantly evolving. Organizations face hurdles from employees who switch locations, whether permanently or part-time. After all, you may have an employee who decides to work remotely from their Florida beach house six months out of the year. Or, you may have fully remote employees move to several different states. In any case, you must determine nexus for each of your remote employees, and their potentially unique situations.
Early in the COVID-19 pandemic, some states introduced waivers providing that remote employees in their state would not create nexus for specific taxes. However, those policies are now mostly expired. Determining whether/where an employee creates “nexus” (i.e., a filing obligation) for an employer is a tricky process, given that each state has its own rules. Figuring out where your organization stands may require a lot of research and patience. Once nexus is established, an employer may be responsible for income taxes, gross receipts taxes, sales taxes, and other local taxes. Even if the nexus results in minimal/zero additional tax, it is still important to abide by state filing rules to avoid penalties.
A Look at 'Convenience of the Employer Rules'
Currently, five states tax income even when the employee doesn't live or work there, which is deemed a “convenience of the employer rule.” States with this rule claim that remote employees can be taxed in their employer's state, even if they reside and work in another state. However, if an employee works remotely in a state where wages are sourced to where the work is performed, employees may be taxed on wages earned in that state. Wages may be essentially “double-taxed.” If an employee's state of residence does not offer a credit for taxes paid to another state, it will be hard to avoid that double taxation.
States currently imposing “convenience of the employer rules” are Connecticut, Delaware, Nebraska, New York, and Pennsylvania. As each state in the nation explores new regulations and tax policies in our constantly evolving pandemic world, this list is subject to change.
When to Seek Help
Many factors come into play when determining state and local tax compliance. You should consider obtaining help from a tax professional if:
- Your organization has a large population of employees working remotely, and those remote employees reside in a wide geographical area
- You haven't evaluated your nexus for state and local tax filing obligations recently
Working with an experienced state and local tax professional helps ensure you meet your filing and tax compliance obligations. If you need assistance or have any questions, please contact us.
Published on February 25, 2022