It was just five months ago that the pandemic hit, and many found themselves working from home due to COVID-19 while their respective states were issuing a state of emergency.
Many businesses required employees to work-from-home in response to government orders and public health recommendations. As a result, many state tax issues arose from allowing employees to telecommute.
Will a company establish nexus in the state where an employee is working from home?
The term “nexus” refers to a connection to another state that arises from the nature and frequency of contacts that an out-of-state company maintains in a state before it becomes subject to that state’s tax laws and jurisdiction. Minimal contact is needed before an out-of-state company is subject to another state’s tax laws. Since the nexus threshold is rather low in the majority of states, most have indicated that the presence of one to five telecommuters in the state would establish nexus and an income tax filing obligation for the out-of-state company.
Due to the confusion caused by telecommuting, companies must now figure out their state income tax and withholding tax responsibilities due to their nexus in another state. The good news, however, is that many states have issued guidance, which is as follows:
District of Columbia
The District of Columbia will not impose corporation franchise tax or unincorporated business franchise tax nexus due to temporary teleworkers during the pandemic. The District waived nexus for businesses with remote employees or active official stay-at-home orders during the epidemic. Employees working in D.C. from other jurisdictions do not create nexus for their employers. D.C. has not issued any changes or revisions to current withholding requirements due to Covid-19.
Source: https://otr.cfo.dc.gov/release/otr-tax-notice-2020-05-COVID-19-emergency-income-and-franchise-tax-nexus
Georgia
Companies will not establish nexus in any of these states during the pandemic by telecommuters working from home or another location other than the employees’ primary work location. A company does not need to withhold in these states from which the employees are telecommuting.
Source: https://dor.georgia.gov/coronavirus-tax-relief-faqs
contact a member of Withum’s State and Local Tax Team.
Illinois
The Illinois Department of Revenue (“IDOR”) issued guidance to out-of-state employers, who employ Illinois residents working from home due to Covid-19. As such, out-of-state employers who typically would not be required to withhold Illinois income tax from employees that are Illinois residents may now be subject to Illinois withholding requirements. Employee compensation is subject to Illinois Income Tax Withholding when an employee has performed regular work duties in Illinois for more than 30 working days. If an Illinois resident employee has performed work for more than 30 working days in their Illinois home for an out-of-state employer, the employer may be required to register with the IDOR to withhold Illinois Income Tax from the employee. However, out-of-state employers from states that have a reciprocal agreement with Illinois (i.e., Iowa, Kentucky, Michigan, and Wisconsin) should not change anything and continue to operate in the same manner as before the pandemic.
Maryland
While the state acknowledges the temporary stay-at-home orders issued by the state government and social distancing measures recommended by the CDC, Maryland will not change how it analyzes nexus and will continue to consider nexus determinations on a case-by-case basis. However, the state did indicate that it “will consider the temporary nature of a business’ interim workplace model and employee deployment due to the current health emergency in making a nexus determination.” The state also indicated that nothing has changed concerning its withholding requirements, as the employee’s physical presence always has determined the withholding. Therefore, compensation paid to a Maryland nonresident who is telecommuting from Maryland is Maryland-sourced income and subject to withholding.
Residents of Virginia, Washington D.C., West Virginia, and Pennsylvania who earn wages, salaries, tips, and commission income for services performed in Maryland are exempt from Maryland state income tax, and withholding, because Maryland has a reciprocal agreement with these states.
Source: https://www.marylandtaxes.gov/covid/documents/TaxAlert050420-EmployerWithholdingonTeleworkers.pdf
Massachusetts
For the duration of the pandemic, Massachusetts will not consider the presence of one or more employees working remotely in Massachusetts solely due to the COVID-19 epidemic to be sufficient in and of itself to establish corporate nexus. Such presence will not, in and of itself, cause a corporation to lose the protections of Public Law 86-272. Services performed by an employee working remotely in Massachusetts due to the pandemic will not increase the numerator of the employer’s payroll factor for corporate apportionment purposes.
Furthermore, the presence of employees working remotely in Massachusetts due to “a government order issued in response to the COVID-19 pandemic, a remote work policy adopted by an employer in good faith compliance with federal or state government guidance or public health recommendations relating to COVID-19, or the worker’s compliance with quarantine, isolation directions relating to a COVID-19 diagnosis or suspected diagnosis, or advice of a physician relating to COVID-19 exposure (collectively, “Pandemic-Related Circumstances”) will not, by itself, create a withholding obligation for such employees.”See830 CMR 62.5A.3.
Source: https://www.mass.gov/technical-information-release/tir-20-10-revised-guidance-on-the-massachusetts-tax-implications-of
New Jersey
While the state did not comment on whether the temporary telecommuting of employees creates corporate income tax nexus within the state, the state will temporarily waive its sales tax nexus standard, which an out-of-state seller established when it has an employee working in New Jersey.
Additionally, an out-of-state company should source its wage withholding based upon its jurisdiction during this time. The Reciprocal Personal Income Tax Agreement between New Jersey and Pennsylvania eliminates wage sourcing issues for these employees as there is an agreement not to tax the wages of a resident of the other state.
Source: https://www.state.nj.us/treasury/taxation/covid19-payroll.shtml
Pennsylvania
Due to the “Proclamation of Disaster Emergency” issued by Governor Wolf in early March, the Department will not seek to impose corporate net income taxnexussolely on the basis of telecommuters working from home temporarily due to Covid-19 for a business that does not have nexus with Pennsylvania.The Department will also not impose sales and use tax nexus on the basis of having employees working in the state for a business in another state with no nexus to Pennsylvania.
It’s important to note that if an out-of-state company is only registering for an employer account to withhold for a P.A. resident, or an employee who will work in P.A., the out-of-state company will need to complete Section 2.2 of the PA-100“Date of First Operations in P.A.,” with the actual date or the estimated future date of when the employee will begin working in P.A.
Source:https://revenuepa.custhelp.com/app/answers/detail/a_id/3740/kw/nexus/related/1/session/L2F2LzEvdGltZS8xNTk1OTU2MTM3L3NpZC9UUGhIczJQbw%3D%3D and https://revenue-pa.custhelp.com/app/answers/detail/a_id/1232/related/1
Connecticut, Florida, Michigan, New York, Ohio, and Texas have not issued any guidance to date.
What about those states that have not issued guidance?
For those states that have not issued guidance, either an employee’s income tax obligation remains the same as it was before COVID-19, or the state will apply the physical-presence rule and impose income tax on an employee working from home. A lack of guidance may inadvertently create double taxation for those employees and employers who are straddling two states.
Authors: Bonnie Susmano | [email protected], JD, MBA, Jeffrey Clayman, CPA, JD, LLM | [email protected] and Adam Caputo, CPA, MBA | [email protected]
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