Tax Concerns of a Remote Workforce
June 02, 2020
In “normal” times (remember those?), having remote employees raises a host of tax issues for both the employer and employee. In the current COVID-19 environment, many businesses have their entire workforce working remotely, greatly amplifying these issues and potentially raising new ones. Two of the bigger issues faced by businesses and their employees concern nexus, where the business needs to file tax returns, and the sourcing of employee wages for personal income tax purposes. As is often the case in state taxation, there are winners and there are losers, and which bucket you fall into often depends on your specific facts and circumstances.
Perhaps one of the biggest issues facing businesses, even in normal times, is that of determining where they need to file tax returns, or where they have nexus. Generally, the threshold for determining whether nexus exists in a state is very low, including merely selling into a state. As such, having a remote employee located in a state generally creates nexus for all taxes.
In the current environment, many companies have their entire workforce working from some remote location, often their home residence, but also from other locations such as vacation homes, relatives’ homes and so forth. This raises the question: “Does the presence of employees in these distant locations now create nexus in all these states?” While generally the technical answer to these questions is “yes,” as noted above, the company-specific answer to this question will depend on a business’ particular facts and circumstances, including its risk profile.
Several jurisdictions—including Indiana, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania and Washington, D.C.—have released guidance stating that having remote employees working from home due solely to COVID-19 will not create nexus. While this guidance appears fairly straightforward, it raises several questions, including: What if these same employees worked from home one day per week prior to COVID or will do so post-COVID?
For states that haven’t released guidance regarding employees working from home, their nexus provisions should be reviewed in detail. For instance, some states impose filing responsibilities on companies deriving income from within their borders or deriving benefits from the state’s market, and others look to whether the company was intentionally targeting their marketplace. If employees are working from home due to governmental orders, can it be said that the company is purposely targeting the market merely by forcing an employee to work from home? If an internal IT person is forced to work from home by a shelter-in-place order, is a company deriving benefits from the state’s marketplace? From a risk standpoint, it may be important to consider whether a company has only one employee working remotely in a state or 100.
From an employee’s standpoint, and to an extent an employer’s, a significant concern is how wages should be sourced for personal income tax and withholding purposes (i.e., which jurisdiction can tax the wages). As with other areas of state taxation, there is the general rule, along with a host of exceptions and variances.
Generally, for personal income tax purposes and the related withholdings, wages are sourced to the location where the services are performed, which would lead a business to potentially change sourcing and withholding from the office location where the employee worked pre-COVID to the employee’s residence location where work is currently performed. One practical hurdle companies may encounter is that their systems may not be capable of tracking the location where an employee is actually working, or the company may not have nexus in all the states in which employees reside. In this case, it may not be able to withhold and file the applicable returns. One exception to this general sourcing rule is the “convenience of the employer” rule that some jurisdictions utilize.
Under New York’s convenience of the employer rule, wages are attributable to the employee’s New York office, regardless of where the work is actually performed, unless the remote location is for a specific business need of the employer—as opposed to the convenience of the employee. Consequently, wages of an employee choosing to work from home in another state generally continue to be treated as New York wages and are subject to New York taxation and withholding. New York has fairly stringent criteria for determining whether a remote work location is for the convenience of the employer or the employee.
Under the current circumstances, many employees may not technically meet these criteria. However, the question remains as to whether these stringent tests apply to the current environment where state governments, and possibly the employers, have mandated that employees work from homes as opposed to their offices. Several jurisdictions have released guidance regarding how wages of telecommuters should be sourced in a COVID environment, including Maryland, Minnesota and Philadelphia. Finally, businesses may need to consider what impact, if any, reciprocal agreements between states have on wage sourcing and withholding requirements.
Other issues businesses may need to consider include the sourcing of their revenues from services for apportionment purposes and state unemployment tax provisions, which differ from those for withholding. Clearly, there are a myriad of issues that businesses and their employees need to consider as the result of having a work-from-home staff. While the technical answer may often dictate how to handle these issues, practical considerations like risk management and systems limitations may often prevail. Thus, it is important to discuss these issues with a qualified tax advisor who can help guide you with your decision.
This article was published in the RFG Weekly Roundup™ on May 15, 2020.