“Wherefore Art Thou?”
- 1. Famous line from Romeo and Juliet?
- 2. What employers need to be asking their employees to determine their state tax obligations for 2020?
- 3. Both of the above.
Unfortunately, No. 3 maybe the right answer.
The COVID-19 pandemic has changed the way many employers operate and has forced some employees out of the office to work from home. In some cases, employees have worked remotely from another state. Employees are working at their parents’ home, with their in-laws, with friends, in the mountains, or by the water. The internet has opened the possibilities for where employees can work. In addition, what was thought to be a short-term pandemic has turned long term with many employees now working remotely in excess of 6 months during 2020 and still counting.
These trends have highlighted state nexus rules, nexus being defined as a company’s connection to a state. Generally, when an employee works outside of the state(s) where the employer operates, physical nexus is created, subjecting the employer to the tax rules of the other state(s) jurisdiction.
With many employees hunkered down and working remotely in different states during 2020, one could anticipate numerous employers unwittingly creating nexus in new states for 2020. As a result, the employers become subject to new state and local tax requirements. The requirements vary, but could include state and local income tax withholding for employees, payment of workers’ compensation and unemployment insurance, as well as state and local income taxes.
The prospect of navigating the obligations brought about by a remote workforce scattered throughout the country may be daunting for employers. In response to the COVID-19 pandemic, many states are addressing nexus rules and withholding requirements.
The approach varies from state to state and not all jurisdictions have addressed the issues directly. Nevertheless, several states have provided relief from their typical nexus framework, asserting that changes in the temporary work locations of a business’ employees due to the COVID-19 pandemic will not be used to establish nexus in that state. In other cases, the length of time remote workers spend in a state is consequential.
Notably, several states have not provided comparable provisions addressing nexus during the pandemic. The patchwork of rules that currently apply requires due diligence by employers. Employers with employees that worked remotely in other states during 2020 should review their nonresident income tax withholding requirements and be cognizant of the potential assertion of nexus in states where employees work in 2020.
If you have questions about remote employees and its impact on your business, please contact our office. We are happy to assist you.