Employers should be aware of compliance issues beyond income tax when dealing with US domestic remote workers, a payroll practitioner said May 19.
Becky Harshberger, CPP, vice president and practice lead for payroll tax at Entertainment Partners, reminded employers to always be aware of where their employers are working. “Nothing is cut and dry, but do you really know if they’re physically working in their house?” she asked.
For income tax, research should start with states’ definitions of residents and nonresidents, Harshberger said. “If you’re newer to payroll, that’s how you start the research,” she said.
For nonresidents, the work state almost always requires withholding unless a day or dollar threshold or reciprocity agreement applies, she said.
There can also be convenience-of-the-employer rules, most prominently in New York, Harshberger said. Roughly defined, “employees who work for a company in one state but do their work remotely in another state are subject to the payroll tax in the state where their employer’s office is located,” she said.
Additionally, Harshberger highlighted some state tax court decisions related to remote work. In March, Alabama’s tax tribunal upheld an income tax assessment on an employee who moved to Idaho to work remotely for an employer in Alabama. The court found that the employee no longer had an Alabama domicile but that his income was still Alabama-sourced because he was considered to “transact business in Alabama” through his remote employment.
“Here’s the problem that you’re going to come up with: People don’t know how to pay income taxes when they’ve already lived and worked in the same state,” Harshberger said.
The same basis was used for another case published May 19 where a Florida resident working partially remotely for an Alabama employer was considered to have Alabama-taxable income.
Unemployment, Temporary Disability Insurance
Employees who move to a different state may still be able to claim temporary disability benefits in their former state within a certain period, for example, 18 months in California, Harshberger said.
“People, when they’re relocating, they don’t think about either reducing or losing benefits,” she said.
Harshberger said California TDI will not have a wage base for 2024.
Employers may also be audited if an employee moves states, does not notify their employer, and then becomes unemployed and claims benefits, Harshberger said. Workers’ compensation companies may also audit based on unemployment tax returns, she said.
New family leave programs include Colorado, which began Jan. 1, 2023; Delaware, which begins Jan. 1, 2025; Maryland, which is planned to begin Oct. 1, 2024; and Oregon, where contributions began Jan. 1, 2023, Harshberger said.
Harshberger also said New Jersey TDI benefits should be reported as third-party sick pay in Box 13 of Form W-2, Wage and Tax Statement, as a portion of the benefits are subject to federal tax.
Employers covering employees’ out-of-state travel costs for abortion or miscarriage services should determine if their assistance meets the Internal Revenue Service’s definition of medical care, in which case taxable and nontaxable expenses are defined, Harshberger said. The full amounts of nonaccountable stipends may be taxable to the recipient, she said.
California, Illinois, Maryland, Maine, Oregon, New York, and Washington require private health insurance to cover abortion, while 11 states restrict its coverage, Harshberger said.
For stock options and 401(k) plans, Harshberger asked attendees to consider how they tell plan administrators about employees’ work state changes and whether they tax 401(k) distributions where earned or where the employee lives in retirement.
Income from bonuses and stock options, especially bonuses based on prior years of service, might need to be allocated to different states based on where the employee lives, Harshberger said
Arizona, Connecticut, Delaware, Illinois, Kansas, Missouri, Nebraska, and New York have nonresident allocation forms, which allow an employee to attest to how much time they spend in the state and allow the employer to rely on the attestation, Harshberger said.
As regards wage and hour, some large retailers have received lawsuits for violating New York’s requirement that “manual workers,” which it interprets to include any employee that spends more than 25% of their time doing manual labor, must be paid weekly, Harshberger said.
Harshberger warned that if employers choose to do courtesy withholding, or withholding tax for employees who live in states where the employer is not registered to do business, some states insist on registration as a business. She said that her company’s courtesy withholding for residents of Alabama, Arizona, and West Virginia working in California caused those states to ask about the company’s registration in those states.
States are continuing to consider adding employee benefits and looking at remote work and business registration, Harshberger said.
“Everything that I’ve talked about is a trend to follow. If one state’s doing it, other states are looking at it. Just be aware,” Harshberger said.
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