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Revisiting State and Local Payroll and Employment Taxes in Light of COVID-19

It is becoming even more imperative to review the implications of state and local payroll taxes as workforces of businesses across the nation transition into remote employment arrangements as a result of COVID-19.

Generally speaking, there are a number of state tax issues that should be considered with respect to telecommuting employees. This includes income tax nexus (i.e., filing requirement), sales/use tax nexus, income tax apportionment (i.e., Cost of Performance sourcing and/or Payroll Factor rules), in addition to employment tax wage sourcing, for withholding payroll tax purposes.

With respect to a mobile workforce, many of these issues have been prevalent with technological workplace advances in recent years and have historically impacted several business sectors. While most states source employee wages for payroll withholding purposes to the state where the employee performs the services, there are certain states with enacted laws that require non-resident wages to be sourced to the office of the state where the employee is assigned. The wages of an employee may result in a tax withholding requirement in the office state, regardless if the employee is telecommuting from home and working in another state. For example, New York has applied what is known as a “Convenience of Employer” rule, which says that wages are considered to be New York sourced, unless the work was performed outside of New York for “the necessity of the employer”, opposed to for the convenience of the employee.

It has been New York’s position that if an employee is assigned to the employer’s New York office or if the primary office is deemed to be in New York, any home workday would be considered to be New York. This is unless the home office is considered to be a bona fide employer office. The bona fide office designation requires the examination of several complex factors in making such determination. Coupled with such analysis, is the consideration that if a remote employee would be deemed to be assigned to New York, or if the employee’s primary work location would otherwise constitute as New York.

In addition to New York, a handful of other states such as Connecticut and others have enacted comparable laws that may require similar examination. It is uncertain if states with such laws would provide an exemption with respect to COVID-19 for the health pandemic and/or if the state would make a distinction between voluntary/ encouraged work from home initiatives versus mandatory work from home orders.

For more information or questions on these updates, please contact a member of the State and Local Tax Team.

Notwithstanding the convenience laws, where states otherwise generally withhold on wages based on where work is primarily performed, such as an employee’s home; it is imperative to determine even if a business has not regularly operated in such state, if the employer would now have a payroll withholding requirement. If an employee is now working an extended period of time from home, attention should be paid to if the remote home office would establish nexus for business taxes such as income or sales/use tax, coupled with the payroll/employment wage withholding considerations.

Unemployment Considerations

It should also be highlighted that there is more uniformity among the states with respect to unemployment insurance, which is generally based on where the employee’s work is localized. As such, remote employees that are working from home temporarily as a result of COVID-19 would likely require employers to continue to pay the state based on the location of the employee’s assigned office. This should continue to be monitored should it be determined the temporary status changes in the view of a state.

Implications

Although many of these mobile employment issues have been a trending area of risk management concerning employment withholding obligations, the COVID-19 virus has broadened the number of businesses that might be impacted by this unprecedented event. The risk of non-compliance of payroll withholding could be significant and may result in the employer being fully responsible for any deficiency in withholding tax, in addition to penalties and/or interest. Furthermore, “responsible persons,” such as an officer who exercises direct control, may have personal liability with respect to such withholding taxes. Employees in states who report the proper wage allocations based on where worked may find themselves in the situation where they overpaid their non-resident state and underpaid their resident state, putting the employer on alert with a state. Employers that have historically leveraged a remote workforce or is now suddenly adopting to this new telecommute workforce environment are encouraged to review their policies in the advent of this unforeseen pandemic.

Author: Jason Rosenberg | jrosenberg@withum.com

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