Guest Commentator: Thomas M. Frascella, Director of Tax Strategies, Kreischer Miller @KreischerMiller
What state and local tax implications of employees working remotely should employers be aware of and how can employers best meet these requirements?
The dramatic rise in the number of employees working remotely as a result of the pandemic and government-mandated shutdowns has created potentially new employee withholding and state tax nexus implications for employers.
Once businesses were ordered to shut down earlier this year, some states issued guidance stating that employees who were telecommuting because of a work from home order would not impose a withholding responsibility on employers. However, most states were silent and issued no guidance at all, leaving employers to figure out their own withholding obligation.
As states have reopened and more businesses are returning to the office on either a full or part-time basis, employers face new challenges regarding remote workers who they are allowing to continue working from home. While the presence of these remote employees may result in tax nexus for the employer, it will most certainly require employers to determine the state where withholding should occur.
Many states base this decision on the location where the work is performed. However, some states, including Pennsylvania, Delaware, Connecticut, and New York, utilize a “convenience of the employer” rule. This rule basically states that if an employee is working in another state for their own convenience, their wages are still subject to tax in the employer’s primary location.
As we continue to navigate this new environment, employers should assess their withholding policies to make sure they are in compliance with state reporting requirements. Some employers will have an easier time because of reciprocity. However, others with employees working remotely from non-reciprocal states will have to determine how the home state as well as the work location state source wages.
Employer withholding involves a number of factors such as the physical location of the business, remote worker locations, reciprocity, and state rules. Administrative burdens, as well as other tax considerations, may force employers to incur significant compliance costs.
The path forward for employers is not clear and any decision deserves careful consideration. An employer also needs to consider other taxes imposed by the state where the remote worker is located. Ultimately, employers should carefully evaluate all of the facts and circumstances when deciding where to withhold.
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