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Remote Work Tax Challenges for Employers and Employees
The COVID-19 pandemic forever changed the way we think about working remotely. Fully remote or hybrid work options are becoming more commonplace as employers adapt their policies to allow for more employee flexibility. However, this shift will cause headaches for employers and employees as they attempt to navigate the evolving state and local tax ramifications.
By Patrick K. Skeehan, JD
The COVID-19 pandemic forever changed the way we think about working remotely. As companies reopen their offices, the landscape will be vastly different from what it was before the pandemic forced many of us into remote work arrangements in March 2020. Fully remote or hybrid work options will become more commonplace as employers adapt their policies to allow for remote work on a part-time or even full-time basis. However, this shift will cause headaches for employers and employees as they attempt to navigate the evolving state and local tax ramifications. With states and localities now lifting temporary policies that were in place during the pandemic, there is no doubt that taxing authorities will take differing approaches to the tax treatment of remote work arrangements.
Evolving State Tax Guidance
Tax withholding complications will quickly arise for employees working in a different state from where their employer is located. The general rule is that the employer withholds tax in the state where the employee works, with many states imposing a withholding obligation once the employee has worked in a state for a certain number of days. For employees who had traditionally commuted across state lines to go to work, employers may now be required to withhold state personal income tax based on the employee’s home location instead of the employer’s location, requiring payroll tax registration in additional states.
Many states had issued temporary emergency guidance that addressed the income tax withholding treatment of employees working from a different state due to the pandemic. Pennsylvania and New Jersey, for example, indicated that income tax withholding requirements would not change during the time that employees are working remotely. Many states also agreed to temporarily suspend business tax nexus thresholds in recognition of employees working remotely in a state in which a company would not otherwise have a tax-filing obligation.1 However, the Pennsylvania Department of Revenue ended its temporary guidance on June 30, 2021, after which existing Pennsylvania tax rules govern and regular nexus thresholds apply.2
Aggressive State Approaches
Pennsylvania is one of several jurisdictions that follows a “convenience” rule, which says that if an employee works remotely for their own convenience, and not as a requirement of their employer, the days worked remotely would be treated as days worked at their assigned work location. New York interprets this rule most aggressively, going as far to say that for nonresidents whose primary office is located in New York, days spent teleworking during the pandemic are considered days worked in the state unless the employer established a bona fide employer office at the teleworking location.3 New York’s guidance differs from Philadelphia, which specifies that nonresident employees are not subject to wage tax during times they are required to work outside Philadelphia, including during the pandemic.4 While New York is aggressively enforcing its convenience rule by auditing the income tax returns of nonresidents working elsewhere during the pandemic, states such as Connecticut have enacted legislation allowing residents to obtain a credit for income tax paid to another state that applies a convenience rule.5 New Jersey, in contrast, has threatened litigation to challenge New York’s policy.
Massachusetts adopted a temporary regulation allowing the state to tax the income of nonresident employees that worked in the state prior to the pandemic, but teleworked during the pandemic.6 In response, New Hampshire asked the U.S. Supreme Court to rule on whether Massachusetts may constitutionally tax nonresidents working in New Hampshire and lacking a connection with the state during the pandemic.7
Although the Court ultimately declined to hear the case, the litigation has focused greater attention on the ability of states following convenience rules to tax the income of employees working beyond their borders during the pandemic and afterward. Further litigation is expected.
Looking Ahead
So, where do these different state tax approaches to remote work leave employers and employees working remotely in 2021 and beyond? To start, tax advisers should recommend that employers closely track employee locations for payroll tax reporting and business tax-filing purposes. The state where an employee is working may not be consistent with the employee’s primary work location. It is also important for employers to closely follow state and local guidance on remote work to confirm when, or if, such policies expire in conjunction with the lifting of state and local restrictions. Understanding the application of these fast-changing rules is critical to the adjustment of tax withholding and business tax-filing policies and processes.
Employers should also give careful thought to crafting policies that set parameters for remote work to minimize additional payroll tax withholding and business tax-filing obligations. Questions to consider include whether employees are permitted to move to another state to work remotely, and whether they are free to work from any location. For companies located in convenience jurisdictions, the specific wording of policies on remote work may determine whether a nonresident employee is in fact required to work remotely rather than for their own convenience. As businesses begin to reopen their offices, they must understand the implications of making the office available to employees, even on a part-time basis. The communication of clearly delineated policies may be critical in determining the tax consequences of an employee’s work location.
Employees should likewise be aware of the state and local tax implications of working remotely in a different state. States with statutory residency rules may consider individuals to be a tax resident of their state should they spend six months or more working remotely in that state during a given year. Dual residents who become subject to personal income tax in two states must consider the implications of double taxation on their wages, the possibility of claiming credits for taxes paid to other states, and additional tax return filing obligations.
The pandemic may be subsiding, but remote work is here to stay. While states and localities provided temporary tax policies during the public health crisis to address remote work, employers need to determine how the end of these policies will impact their payroll tax reporting and business tax-filing obligations going forward. Employers should plan to develop specific policies and procedures around remote work sooner rather than later, so they don’t make missteps resulting in unwanted tax liabilities.
1 Remote workers may create nexus by their physical presence in a state due to working remotely in that state for as little as one day. Once nexus is established, a company may have additional filing obligations for income, franchise, gross receipts, and sales and use tax purposes.
2 See Telework Guidance, Pennsylvania Department of Revenue, updated June 17, 2021.
3 Frequently Asked Questions about Filing Requirements, Residency, and Telecommuting for New York State Personal Income Tax, New York Department of Taxation & Finance, updated Oct. 19, 2020.
4 Wage Tax Policy Guidance for Nonresident Employees, Philadelphia Department of Revenue, updated Nov. 5, 2020.
5 Connecticut Public Act No. 21-3, Laws 2021.
6 Massachusetts Regs. Code Tit. 830, Section 62.5A.3.
7 New Hampshire v. Massachusetts, No. 22O154, U.S. Supreme Court, motion for leave to file bill of complaint denied, June 28, 2021.
Patrick K. Skeehan, JD, is a state and local tax senior manager with Grant Thornton LLP’s Washington national tax office. He can be reached at patrick.skeehan@us.gt.com.
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