Read this if you are a business with employees working in states other than their primary work location.
The COVID-19 pandemic has forced many of us to leave our offices to work remotely. For many businesses, that means having employees working from home in another state. As telecommuting become much more prevalent, due to both the pandemic and technological advances, state income tax implications have come to the forefront for businesses that now have a remote workforce and employees that may be working in a state other than their primary work location.
Bipartisan legislation known as the Remote and Mobile Worker Relief Act of 2020 (S.3995) was introduced in the US Senate on June 18, 2020 to address the state and local tax implications of a temporary or permanent remote workforce. The legislation addresses both income tax nexus for business owners and employer-employee payroll tax responsibilities for a remote workforce. Here are some highlights:
Business income tax responsibility
The legislation would provide a temporary income tax nexus exception for businesses with remote employees in other states due to COVID-19. The exception would relieve companies from having nexus for a covered period, provided they have no other economic connection to the state in question. The covered period begins the date employees began working remotely and ends on either December 31, 2020 or the date on which the employer allows 90% of its permanent workforce to return to their primary work location, whichever date comes first.
The temporary tax nexus exception is welcome news for many business owners and employers, as a recent survey by Bloomberg indicated that three dozen states would normally consider a remote employee as a nexus trigger. Additional nexus would certainly add further income tax compliance requirements and potentially additional tax liabilities, complications that no businesses need in this already challenging environment.
Employee and employer tax responsibility
The tax implications for telecommuting vary wildly from state to state and most have not addressed how current laws would be adjusted or enforced due to the current environment. For example, New York implements a “convenience of the employer” rule. So if an out-of-state business has an employee working from home in New York, whether or not those wages are subject to New York state income tax depends on the purpose for the telecommuting arrangement.
New York’s policy is problematic in the current environment. Arguments could be made that the employee is working for home at their convenience, at the employer’s convenience, or due to a government mandate. It is unclear which circumstance would prevail and as of this writing, New York has not addressed how this rule would apply.
If enacted, the Remote and Mobile Worker Relief Act would restrict a state’s authority to tax wage income earned by employees for performing duties in other states. The legislation would create a 90-day threshold for determining nonresident income tax liability for calendar year 2020, enhancing a bill in the House which proposes a 30-day threshold.
The 90-day threshold applies specifically to instances where the employee work arrangement is different due to the COVID-19 pandemic. For future years, the bill would put in place a standardized 30-day bright-line test, making it easier for employees to know when they are liable for non-resident state income taxes and for employers to know which states they need to withhold payroll taxes.
What do you need to do?
With or without legislation, the year-end income tax filings and information gathering will be very different for tax year 2020. It’s more important than ever for business owners to have proper record keeping on where their employees are working on a day-to-day basis. This information is crucial in determining potential tax exposure and identifying a strategy to mitigate it. The Remote and Mobile Worker Relief Act would provide needed guidance and restore some sense of tax compliance normalcy.
If you would like more information, or have a question about your specific situation, please contact your BerryDunn tax consultant. We’re here to help.