As we approach year end, companies need to be aware of how COVID-19 and the subsequent increase in teleworking/remote workers, affects their employees’ state withholdings and possible new state filing obligations for the business.
Income Tax Withholding for Remote Workers May Need to Be Updated
Remote workers generally owe taxes to the state from which they work, regardless of the employer’s location. Employees now working in a different state, rather than the state where the employer is located, may need to change their state withholding to the state where they are currently working.
Some states have a “convenience of employer” rule. Under this rule, if the employer or employee’s principal office is located in one of these states, then the employee’s compensation earned while telecommuting will be treated as if it was earned in the employer’s location. These states are: AR, CT, DE, NE, NY, and PA.
There are also exceptions for employees working in states which have reciprocal agreements (Indiana has reciprocal agreements with Ohio, Michigan, Kentucky, Pennsylvania, and Wisconsin). Employers and employees need to review employee state withholdings and adjust accordingly.
Remote Workers May Cause Additional State Return Obligations
Allowing teleworking employees to work anywhere with an internet connection can establish nexus (a strong enough connection with a jurisdiction) where the employee is physically working, creating new state tax filing and payment obligations in a state where the business doesn’t otherwise have a filing obligation.
Some jurisdictions have waived nexus for businesses with temporary remote employees during the pandemic or active official stay-at-home orders. They are: AL, CA, DC, GA, IN, IA, ME, MA, MN, MS, NJ, ND, OR, PA, RI, SC and WI. Employees working from these jurisdictions do not create nexus for employers.
For example, an Illinois employer with no prior nexus in Indiana now has an employee working remotely in Indiana. Because Indiana has waived nexus due to the pandemic, having a remote employee working in Indiana does not cause the Illinois business to have an Indiana filing obligation. Conversely, if an Indiana company with no prior nexus in Illinois now has an employee teleworking in Illinois, the business could now have an Illinois filing obligation whereas Illinois has not waived nexus.