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Pandemic Increases Potential for Presence in More Jurisdictions

May 18, 2022, 8:41 PM

With remote work more prevalent than ever, employers should be aware of the tax and pay consequences of establishing nexus with a jurisdiction, two American Payroll Association representatives said May 13.

“Remote work is here to stay,” said Laura Lough, the APA’s director of publications.

As an example of a very flexible remote work policy, Airbnb is allowing employees to work remotely from any country or jurisdiction the company operates in for up to three months at a time, also creating a team to help with the tax and payroll obligations of the policy, Lough said.

Such workers who travel to work remotely are known as digital nomads, Lough said at the APA’s 40th Payroll Congress in Las Vegas.

“I think it will show that there are going to be companies that will have to offer greater flexibility,” Lough said while characterizing Airbnb as an extreme example.

Even Wall Street firms have adopted a hybrid work model with partial remote work, Lough said. “I think you can expect that employees are going to want some sort of hybrid situation,” she added.

Nexus Considerations

In the U.S., payroll-related nexus considerations include tax withholding rules and reciprocity agreements, unemployment tax coverage, and labor law provisions, said Lisa Aragon, CPP, a director of payroll training for the APA.

“Just a few years ago, would you ever have thought nexus would be part of your world today? And it’s more than likely to stay,” Aragon said.

Whether a business has nexus with a state was traditionally based on the presence of an office or other work location, or the locations of employees making sales or performing service calls, “so that was pretty easy pre-pandemic,” Aragon said.

Nexus establishes a state’s jurisdiction over a business, including the ability to impose taxes, Aragon said.

During the pandemic, payroll should communicate to other areas of the company that it needs to know where employees are working, Lough said.

States have thresholds of wages or dollar amounts before withholding is required, so employees should be educated on withholding requirements, Aragon said.

Without a reciprocity agreement, tax must generally be withheld from the work state if the employee lives and works in different states, Lough said. The agreements allow exemption from the work state’s income tax and withholding requirements and allow employees to be taxed only in their state of residence.

Employees must file a state’s certificate of nonresidence with their employer in order to be covered by a reciprocity agreement, and the employer does not have to make any withholding changes before the employee files the form, Lough said.

Some exceptions to state withholding coverage include those for employees in interstate commerce or transportation and for military spouses, Lough said. In some states, disaster-relief workers are exempted, but must generally work for an out-of-state employer and be working in a declared disaster area, Lough said.

Employers may also have nexus with a state but not with a locality, so both state laws and local ordinances should be consulted, Lough said.

For example, if an employer is in Delaware but is not in Wilmington, it must still withhold and report Wilmington’s earned income tax from wages paid to Wilmington residents, Lough said.

Unemployment Tax, Wage Laws

The determination of which state’s unemployment insurance law applies to an employee uses a four-step process, starting with whether the employee’s work is localized in a state, meaning work outside the state is incidental, Aragon said. If work is localized, coverage is in that state, she said.

If an employee’s work is not localized but they have a base of operations in a state where they work, the base’s location determines coverage, Aragon said.

If neither of the first two tests apply but there is a place of direction and control in a state where the employee works, that determines coverage, Aragon said.

Finally, if the other three tests do not apply, the employee’s state of residence can be used if the employee performs some work there, Aragon said.

With regard to wage and hour laws, final wages are paid according to the state where the employee works, Lough said.

There is no minimum amount of time an employee must work in a state before being covered by its labor laws, Lough said. Employers should always determine which of state laws, local laws if applicable, or the Fair Labor Standards Act is most beneficial to the employee, and apply the one that is most beneficial, she said.

To contact the reporter on this story: Jamie Rathjen in Washington at jrathjen@bloombergindustry.com

To contact the editors on this story: William Dunn at wdunn@bloombergindustry.com; Jazlyn Williams at jwilliams@bloombergindustry.com