Nexus is an important payroll consideration for any business with remote or traveling workers, but especially so during the Covid-19 pandemic, two payroll professionals said July 15.
Before the pandemic, about 3.4% of U.S. workers worked remotely at least half the time, Kevin Valuet, CPP, director of payroll at IPS Enterprises, Inc., said. Valuet estimated that to represent 5 million workers.
However, telecommuting grew by 173% since 2005 and 90% of U.S. workers said they would like to work remotely at least part-time, Valuet said.
Eighty-four percent of remote workers worked at home, including Valuet, who works full-time from home in Minnesota for a company in Texas, he said.
However, only 26.7% of workers currently working remotely are expected to still be doing so full-time at the end of 2021, Valuet said.
There is a market for permanent remote workers, with 16% of companies only hiring such workers, Valuet said.
Any remote work can lead to potential nexus, which is a relationship between a taxing authority and a business, and tracking employees and keeping up with changing guidelines can be problems, Valuet said.
Employers should be asking themselves whether employees are working from their home, from another state, on road trips, or even from other countries, Valuet said.
The basic rule for withholding income tax is to withhold based on the state where work is performed, Karen Ward, CPP, a director of payroll training for the American Payroll Association, said.
However, residency definitions, reciprocity agreements, and rules for taxing residents and nonresidents can affect whether income is taxable in a given state, Ward said.
Domicile, which can be established through undertaking various measures in a state such as owning property, having a driver’s license or vehicle registration, or registering to vote, is often used to determine residency, Ward said.
Even then, states can have varying definitions of residency that “are not so simple for us,” Ward said.
Reciprocity agreements between states allow tax to be withheld and wages reported only for the state of residence when employees live in one state and work in another, Ward said.
While most of the states with reciprocity agreements border each other, not every single bordering pair has an agreement and some non-bordering pairs have agreements. For example, there is not an Indiana-Illinois agreement, but there is an Indiana-Pennsylvania agreement, Ward said.
When an employee works in multiple states without reciprocity applying, the wages earned in each state must be separated and tax should generally be withheld for the work states, Ward said.
Employees should submit certificates of exemption from withholding where applicable, Ward said.
With regard to telecommuters, a few states have convenience-of-the-employer tests to consider whether remote workers in other states are taxable in that state, Ward said. Primary factors for the tests include whether the employee requires the employer to work remotely or whether the employee is able to perform tasks remotely that cannot be done at a facility of the employer, Ward said.
New York, one of the states with such a test, is “very stringent on this,” Ward said.
Additionally, military spouses have been able to use their spouse’s domicile for state tax purposes since Dec. 31, 2018, under the federal Military Spouse Residency Relief Act, Ward said.
Recurring federal legislation, the Mobile Workforce State Income Tax Simplification Act, proposes that nonresidents can work in any state for up to 30 days in a year before becoming subject to state income tax, Ward said.
While that act has not yet been passed, the Multistate Tax Commission also has a model mobile workforce statute, but North Dakota is the only state that has specifically adopted it, Ward said.
The technology exists for employees to report their locations and employers to easily track them and monitor changes, Ward said.
Payments, Other Considerations
Other issues related to multistate work include conformity with the Internal Revenue Code, both in general and with specific sections such as Sections 125 and 401(k), Valuet said.
Deferrals under these sections are subject to FICA and FUTA, but not federal income tax, and most states consider one or both taxable for unemployment tax but not income tax, Valuet said.
Only New Jersey and Pennsylvania, the latter with exceptions, consider Section 125 deferrals subject to income tax, while only Pennsylvania taxes 401(k) deferrals, Valuet said.
Conversely, every state except Alaska and Rhode Island considers 401(k) deferrals subject to unemployment tax, some with exceptions, while the taxation of Section 125 deferrals is variable, Valuet said.
Considerations related to paying employees that can vary by state include minimum wage, overtime, and predictive scheduling rules, Valuet said. Other variations include the minimum required pay frequency and the length of time allowed for payments on termination, whether voluntary or involuntary, he said.
Valuet and Ward spoke at the American Payroll Association’s Virtual Congress.