An Employer’s Guide to State & Local Tax Implications of Remote Workers
Co-Authored by Merrill Barter
As 2020 draws to a close and businesses begin to focus in large part on year-end tax planning and compliance-related matters, the unique nature of this year will require particular attention. Specifically, from a state and local tax perspective, management should consider how remote workers may impact their companies not only from an income tax withholding and unemployment tax perspective, but from a more general nexus-creating activities perspective.
Income Tax Withholding & Unemployment Tax Matters
Most employers have a long-standing process in place for remitting income tax withholding payments for their employees, as well as for unemployment taxes. However, with more individuals than ever before working from home and other remote locations in recent months due to the pandemic, the underlying fact patterns have changed dramatically for many companies. This may lead to some unusual or unexpected consequences.
For example, a Massachusetts-based bank may have historically only had employees working in Massachusetts and may have, as a result, only been required to register to remit income tax withholding and unemployment taxes to the Commonwealth of Massachusetts. That same bank may historically have had employees who reside in New Hampshire (a state which does not impose a tax on earned income) and Rhode Island, in addition to Massachusetts.
Now let’s assume that the non-Massachusetts residents who previously commuted to Massachusetts for work have been working from home since March of this year. What does this mean for both the employer and the employee?
The answer is that it depends on both the facts and the rules of the various states. Massachusetts has released guidance indicating that employees who were previously working in Massachusetts but who are working remotely in other states now due to the pandemic should continue to remit income tax withholding for those individuals to Massachusetts, as advised in state regulations and Technical Information Release 20-15. At the present time, this guidance is scheduled to remain in place until 90 days after the present state of emergency is lifted in Massachusetts. However, the result would be different for someone hired during the pandemic, under the default/historic rules.
Representatives of the Massachusetts Department of Revenue have indicated that this guidance was issued to provide predictability and certainty to employers. Despite these intentions, the State of New Hampshire has filed a lawsuit against Massachusetts, on the grounds that withholding Massachusetts taxes for individuals when they are not actually working in the state violates the U.S. Constitution. The outcome of this challenge remains to be seen.
Rhode Island issued guidance that is generally consistent with the Massachusetts rules in this area.
In another example, if a company has a Maine location and was withholding Maine income taxes on wages paid to nonresident employees working in Maine, and those employees are now working from their home states due to the pandemic, the company is not required to continue withholding Maine income taxes on those individuals’ wages. This differs from the approach taken in Massachusetts and Rhode Island, as discussed above.
Conversely, if the company is located outside of Maine, was not required to withhold Maine income taxes prior to the pandemic, and now has Maine resident employees working from home in Maine, it is not required to register and withhold Maine taxes on those employees’ wages. Rather, it can keep withholding taxes for the state in which the employees had been working. This applies only to wages paid during 2020. The guidance issued by Maine is here.
Regardless of whether changes were required during 2020, most experts agree that it is more than likely that the nature of work in this country has changed and that even when we emerge from the current situation, more individuals will be working remotely, at least some of the time, than ever before. As a result, businesses will need to devote additional resources to monitoring developments and, when and where needed, implementing changes to their current processes and procedures in this area in the future.
Note that while this article addresses responsibilities from an employer’s perspective, employees may also have personal income tax reporting obligations and consequences unique to the pandemic for 2020. The fact that withholding is not required does not necessarily mean that a tax return is not required on the part of the employee. For more information, see our October 2020 article.
Business Entity Nexus
In addition to income tax withholding and unemployment tax-related matters, having employees present and working in additional states may also lead to business entity income and/or sales/use tax nexus. Under general principles, telecommuting can often lead to nexus and, as a result, additional filing responsibilities.
During 2020, however, many states, including Maine, Massachusetts, and Rhode Island made it clear that the presence of employees who previously worked elsewhere who now are working remotely solely as a result of the pandemic will not create nexus for either business entity income or sales/use tax purposes. Unfortunately, many jurisdictions have not issued guidance, and much uncertainty remains as to what the landscape will look like in the future, both in the short and longer terms.
At the very least, employers should expect additional questions from their tax preparers in connection with 2020 business tax filings, in terms of both nexus-creating activities and apportionment detail. This may also result in additional time and effort on the part of everyone involved at extension time.
While questions remain, businesses should make an effort to understand where and when each of their employees has been working during 2020, and what their plans are as they look forward to 2021. This will enable their client service teams to adequately advise them how to proceed in the areas discussed above.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.