State Tax Implications of Working From Home

The country’s workforce has changed significantly because of the COVID-19 outbreak. Pew Research mentions that, in December 2020, as much as 54 percent of workers wanted to keep working remotely even after the epidemic’s end. Working from home brings with it a lot of concern from an accounting perspective. Tax requirements for remote employees differ significantly from those for in-office workers, and with good reason. Working from home usually means shifting the burden of infrastructure to the person’s home state. Unfortunately, jurisdictions such as New York or California may find themselves lacking taxes to do infrastructural maintenance based on how many people have left the state because they can work remotely. What tax implications are there for this increased remote workforce?

Pre-COVID Employee Taxation

For many years, employers monitored their employees’ locations to pay taxes to the proper jurisdiction. In smaller states, where employees would frequently cross boundaries for work, taxes may have to be split between several administrative districts. COVID gave the entire system a shake-up, resulting in the old methods of taxation no longer being relevant. With so many remote workers, states have had to rethink their taxation paradigm. Luckily, many have seen the sense of exemptions to employers. When the outbreak first happened, businesses shuttered, but the pressures on performance and profit were too much. In short order, they shifted into a sophisticated work-from-home paradigm. Employers quickly addressed concerns about taxation to state authorities. In those troubling times, the states waived some of the tax obligations that businesses would have for employees working within the locale. Now, with remote work becoming more commonplace and likely to stick around, companies have more questions, such as how long the moratorium on collecting these taxes will last.

A majority of US states note that if an employee works from within a state, it gives the employer “nexus” status for tax purposes. The employer doesn’t even have to own any property in the state to qualify for nexus, which means that this qualification can be applied for remote workers. A business with a nexus with a state is obligated to pay income, franchise, or business tax, collect and remit sales tax, remit payroll taxes, and comply with the state’s tax reporting requirements. The pandemic has seen a few states limit the amount of nexus-based taxes businesses will have to pay in the locale for their remote workers. Some states have limited the nexus taxes solely to the franchise and corporate income taxes. Others have increased the number of exemptions to sales and use taxes. States’ opinions on what counts as fair exemptions vary. According to EY, Kentucky had chosen to decide on tax nexus status on a case-by-case basis. Keeping an eye on nexus guidance as published by the states will help inform the business whether it will be required to pay more taxes or not for workers residing within the state.

Withholding Obligations for Employers

Several states stipulate that the employer is required to withhold the amount of personal income tax an employee is supposed to pay from their paycheck. The pandemic has seen a shift in this rule, with many states waiving their right to collect income tax from in-state employees. The pandemic necessitated working from, and state governments decided that they wouldn’t punish employers for having employees doing what needed to be done. Unfortunately, not every state has published updated guidelines regarding employer withholding, meaning that it’s still up in the air about what will happen once the outbreak subsides. It’s entirely possible that an employer may be tasked with withholding income tax twice – once for the employee’s home state and one for the state in which the business operates.

There’s no event that one can point to and use to definitively say that the outbreak is over. Some state governments have limited their relief for nexus status and withholding to time when government-mandated lockdowns have come into effect. Other states have clearly defined timeframes that relief will apply to employees and employers alike. Unfortunately, the definitions used in a majority of the states’ guidelines aren’t very well-defined. Some legislation includes the term “due to the pandemic.” However, there is little to clarify the situation further about what that means. This broad approach requires employers to keep an ear to the ground and follow the state administrative releases religiously as they search for more information. The onus remains on the employer and their accounting department to know what taxes they need to pay to a particular state.

Political Support is Uncertain

Several bills have been proposed in Congress to alleviate this uncertainty. The Mobile Workforce State Income Tax Simplification Act of 2019 helped to simplify matters by outlining that withholding could happen within the employee’s home state or in any state that the employee conducted business on behalf of the employer for more than thirty days during a calendar year. In June 2020, the Remote and Mobile Worker Relief Act of 2020 introduced the idea of a “covered period.” The covered period started when the employee began working remotely due to the pandemic and concluded either on December 31st, 2020, or the date where at least 90% of the employer’s workforce was back in the office, whichever happened sooner. Unfortunately, this still leaves things in limbo for 2021, and the onus remains on employers and their accounting departments to be aware of reporting and withholding requirements.

Post-pandemic, the shortfalls in budgets may see some states seek to remove the protections they instituted to recover income. Businesses need to be prepared if this happens. While remote working may be more beneficial for the employee, the company may need to consider whether it’s worth paying so much in taxes per employee working from home. It’s evident that post-pandemic work policies may need to be adjusted to deal with this new normal. Therefore, businesses must be flexible enough to allow for remote work but be willing to revoke the privilege if it impacts their taxation allowances to a great extent.