As the Covid-19 pandemic forges ahead, disrupting the global economy and transforming workforce logistics, it is imperative that businesses review employment tax implications as the states continue to rollout guidance.
Typically, states source employee wages for payroll tax withholding purposes to the state where the employee performs the services, with certain exceptions. Recently, a number of states have issued guidance and procedures in respect to State and Local Payroll and Employment Taxes in Light of Covid-19. Although many of the states have remained silent, the states that have furnished guidance have been mixed in response. To date, some of these responses include:
- Georgia: The Department of Revenue issued guidance that in respect to FAQs issued on Covid-19, the state would not consider wages of an employee to be Georgia for withholding purposes if the employee is temporarily working in the state pursuant to work from home orders.
- Massachusetts: The state recently issued an emergency regulation, explaining that nonresidents that work in the state but are telecommuting from their home state as a result of Covid-19, will continue to be subject to state tax. Further, the regulations explain that resident employees who worked in a different state but are now working in-state as a result of the situation will not require employers to withhold state tax to the extent employers continue to withhold tax for the other state.
- Maryland: Through varied state issued guidance, the Comptroller’s office suggests that the state will consider the temporary nature of a business’s interim workplace model and employee deployment in light of Covid-19 and will not use these temporary measures to impose additional withholding requirements on the employer. However, the issued Tax Alert is somewhat unsettled, explaining that compensation paid to Maryland nonresidents, who are teleworking in Maryland, is state-sourced income and, therefore, subject to withholding.
- Minnesota: In released FAQ’s, the state explained that for employees who ordinarily work outside the state but are temporarily telecommuting from a Minnesota location will have no effect for state residents as they are already taxed on all income, but that non-residents, the apportionment of their income may change based on the number of days they physically work in the state. However, the Department of Revenue said it will not seek to establish nexus for withholding tax as a result of Covid-19.
- Mississippi: In state released guidance, the Department explained that the state will not change withholding requirements for businesses based on the employee’s temporary telework location, and that the state will not impose any new withholding requirements on the employer.
- New Jersey: The Division of Taxation provided explicit guidance that if employees are working from home solely as a result of Covid-19-related work-from-home orders, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction. The division will not advise employers to change the current work state set-up for employees in their payroll systems who are now telecommuting or are temporarily relocated at an out-of-state employer location; however, employers must consider their unique circumstances and make that decision.
- Ohio: As part of the state’s Covid-19 relief legislation, (enacted on March 27, 2020) comprises a provision in respect to the state’s municipal income tax withholding requirements. In essence the statute provides relief, stating that during the pandemic, any day an employee telecommutes from a municipality will not count towards the minimum day count that triggers the municipality’s income tax and the corresponding employer withholding requirement.
- Pennsylvania: The state issued guidance suggesting employers would still need to withhold tax on employees who normally work in the state, and is now working remotely in another state as result of Covid-19.
- Philadelphia: In issued payroll tax guidance, pertaining to the Covid-19 pandemic, the city explains the uses of a “requirement of employment” standard for payroll taxes. In effect, Philadelphia asserts for nonresidents who work from their home for their own convenience, then the nonresident employee would be still be subject to tax. However, in respect to the pandemic, the city states even if the employer’s base of operation is in Philadelphia, the employer is not required to withhold on wages on nonresident employees if they are required/ordered to work from outside of the city.
‘Convenience of the Employer’ Rules
In addition, a number of states have exceptions to the general withholding rule, often referred to as the “Convenience of the Employer” rules; where that the wages of telecommuting employees continue to be sourced to the employee’s primary office location, unless the work performed outside the state is for the necessity of the employer. Although only a handful of states employ provisions that embody the spirt of this rule, to date, it is unclear how Covid-19 may affect the interpretative purpose of these provisions.
Other Tax Types
Telecommuting as a result of Covid-19 also raises questions about its impact on other state taxes such as income tax and sales tax. Such physical presence in states as a result of telecommuting traditionally would establish a filing requirement in a state. Some states have explicitly addressed this issue, while many states have not. For example, Indiana has said they will not consider an employee working remotely in the state as a result of Covid-19 as a basis for establishing income tax nexus. The District of Columbia, Minnesota, Mississippi, New Jersey, North Dakota, and Pennsylvania are some of the other jurisdictions that have also issued similar guidance as it relates to temporary telecommuting employees and whether or not they create nexus for income tax and/or sales tax purposes. Notwithstanding, businesses should be mindful that while states may be issuing temporary protection of income tax nexus, these protections often may not apply to businesses that generate service revenues. Bearing in mind, service-revenue businesses that would otherwise establish economic nexus with a respective state, may find that these targeted workforce protections would generally not apply if the business already has sourced state sales.
As the pandemic continues to play out, businesses are understandably revisiting the payroll/employment tax issues in respect to this new telecommute workforce environment. Many questions are being asked as the guidance continues to trickle out. For example, uncertainty could arise for a New York based company, with a New Jersey employee whose primary assigned office is New York, but as a result of Covid-19, temporarily re-located to South Carolina to work out of a rental home. Although not all the implications are clear, provided that neither New York nor South Carolina issues any special guidance, it is possible withholding and tax would be obligated not only in South Carolina, but also in New York under the convenience laws.
Moreover, other questions persist in respect to income tax nexus. For example, suppose a remote internet retailer, which operates out of New York, has a remote teleworker working out of the employee’s Pennsylvania home during the pandemic. Pennsylvania has issued guidance that corporate income tax nexus would not be established “during the duration of this emergency.” However, it is unclear if Pennsylvania lifts the stay at home order, but New York continues with such order and the employee is unable to work in New York, if the business would then be subject to Pennsylvania state tax.
Understandably during this time of upheaval, there are many state and local tax questions. Given every business is facing differing situations, it is imperative businesses review their workforce environment in light of the specific state guidance.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Jason Rosenberg, CPA, CGMA, EA, MST, is a senior manager and Adam Caputo, CPA, is a tax supervisor at Withum.