If a business has employees who reside and work in a state different from where the business is physically located or operates, it could face unexpected state and local taxes next year. Remote workers also could find that they'll need to pay income taxes to more than one state on the same earned income.
"COVID-19 opened the possibility for employees to work from anywhere," said Nishant Mittal, senior vice president and general manager at Topia, which makes software for managing remote workers. "This introduces new concerns when it comes to legal and tax compliance."
Employers can take steps to help manage cross-border taxes on the business and to help employees understand their own tax obligations. First, however, business managers must understand the tax laws of their home state and the state where employees are working remotely, Mittal advised.
Business Taxes on Out-of-State Employers
When an employee is working outside of the state or states where the employer operates, it "creates physical nexus, subjecting the employer to the tax regimes of that jurisdiction," wrote Larry Brant, a tax attorney in the Portland, Ore., office of law firm Foster Garvey. Employers could be subject to state income taxes, gross receipts taxes, and sales and use taxes, he explained. Tax requirements imposed at the city or county level could come into play.
"Being subject to state and local taxes generally requires both the preparation and filing of tax returns, and the payment of taxes," Brant said.
For COVID-19-related remote work on behalf of out-of-state employers, some states have temporarily waived the creation of a business nexus for state taxes, according to Cincinnati-based law firm Taft Stettinius & Hollister. Out-of-state employers, however, may still have to withhold state income taxes for remote workers residing in these states.
Local Labor Laws
In addition to state and local taxes, employers should be mindful that the labor and employment laws of the state where a remote employee is working generally will apply to the employment relationship. "These laws may relate to...wage and hour rules, termination of employment, noncompetition, trade secrets, and sick and family leave rules," Brant noted.
In particular, he recommended that employers understand state and local rules applying to:
- Workers' compensation insurance. States "generally require that the employer register for and obtain workers' compensation insurance in the state where the employee is performing the services," Brant explained. Failure to do so may expose the employer to liability, including penalties for noncompliance with the state's workers' compensation laws.
- Unemployment insurance. For remote workers employed by an out-of-state business, a state where the employee is working "generally requires that the employer register for and pay the unemployment insurance premiums for the employee through the state unemployment insurance program where the employee is performing the services," Brant noted. Failure to do so may expose the employer to liability, including penalties for noncompliance with the state's unemployment insurance laws.
Double-Taxing Remote Workers
Usually, if employees live in one state but have been working in another, they'll receive a credit on their resident return to offset the nonresident state tax liability. But that's not always the case.
For remote workers, "if your job is based in New York, you may be on the hook for taxes there—even if the pandemic has you seeking refuge across state lines. The same is true in five other states"—Arkansas, Connecticut, Delaware, Nebraska and Pennsylvania, tax reporter Laura Saunders wrote in The Wall Street Journal.
These states follow what's known as "the convenience rule": If an employee's job is based with an employer in one state, but he or she lives and works in another state out of convenience rather than because the employer requires it, then that employee owes income tax to the state where the job is based.
"In other words, someone with a New York-based job who lives and telecommutes from another state still owes full income tax to New York on that compensation," Saunders reported. "If the other state taxes that income as well and doesn't give a credit for the New York tax, the worker will likely be double taxed."
Mark Klein, chairman of New York City-based law firm Hodgson Russ, told Saunders that "it would be fair for New York to give a break from the convenience rule for 2020. But I don't think it will, given the history of this issue and the present budget crisis."
Keeping Track of Employees
Businesses should keep their employees informed on all state tax regulations and mandates, Topia's Mittal advised. "They should provide consistent updates on tax changes and remain clear on the penalties that could come with tax violations. Employers also need to remember that employee obligations are separate from their own business obligations, and it's up to the employee to ensure their personal taxes are in compliance as well."
HR technology can help employers track their employees' location "to ensure they are following the proper tax regulations and to better understand where their employees are and where they have been working," he noted.
[SHRM members-only how-to guide: How to Engage Remote Employees During the Coronavirus Pandemic]
Staying Current with State Rules
Online resources that can help employers keep up with the tax requirements imposed on them by states where employees may be working remotely include:
Another consideration: For many knowledge workers, temporary work from home has become the new normal. As more move away from the high-cost urban areas where their employers are located, companies like Menlo Park, Calif.-based Facebook are planning to offer remote employees localized compensation commensurate with a lower cost of living, The Wall Street Journal reported.
[Visit SHRM's resource page on Remote Work.]
Related SHRM Articles:
Remote Workers Expect Pay to Reflect Their Locations, SHRM Online, April 2021
Employees Working Out of State Often Fail to Let HR Know, SHRM Online, February 2021
Related SHRM Resources:
Remote Work and State Tax Issues, SHRM Express Request
[Need help with legal questions? Check out the SHRM LegalNetwork.]