This article originally appeared on our partner, Grant Thornton’s website.
The state and local tax implications of COVID-19 are wide-ranging and require considerable attention. Remote working became much more prevalent during the pandemic and will remain a viable option for many businesses even after the pandemic ends. Impacts include: payroll taxes/withholding, nexus, apportionment, and credits.
COVID-19 raised a number of issues, such as:
- Is an employer required to withhold tax from nonresident employees working remotely? Some states have reciprocal agreements to allow withholding in the resident state. Without such an agreement, a business must follow each applicable state and local jurisdiction’s rules on withholding, which vary.
- Physical location: Some jurisdictions tax only the compensation for work physically done within their borders. Income earned while working remotely may be taxed in the employee’s remote work location and not withheld at the employer’s location.
- “Convenience of the employer”: Some jurisdictions also require withholding when work is done outside the employer’s jurisdiction due solely to the preference of the employee, rather than because of an employer assignment. Those jurisdictions may seek to tax nonresident employees on remote work if not done expressly at the employer’s direction. Employers should review their remote work policies and requirements.
- Have jurisdictions issued COVID-19 related guidance and how long will it last? Some jurisdictions have issued temporary guidance about whether and how to withhold taxes. Effective dates vary.
- May a telecommuting employee take a resident state credit if the employer withheld tax in the employer’s jurisdiction during the pandemic? Employees may be able to claim credit in their resident state for taxes paid to other jurisdictions. The resident jurisdictions may review the credit in cases where the taxes were not required to be withheld at the office location due to temporary relief provisions.
- May a telecommuting employee seek a refund of unnecessarily withheld tax? Employees should consider seeking a refund if tax was unnecessarily withheld due to temporary relief provisions. These refunds may involve filings by the employee and/or employer.
- Must an employer register for withholding in the employee’s remote work jurisdiction? If employees continue to work remotely after government restrictions are eased, employers may be required to register for state or local withholding. Employees may effectively become residents of multiple states because of where they choose to travel for extended periods, and withholding may be necessary in these new places of residence.
- How is local withholding handled? Many employees may continue to work in the same state, but in a different local jurisdiction. This may impact tax rates and withholding requirements.
Remote workers may subject their employer to state and local business taxes, including income, franchise, and sales and use taxes. Questions for businesses to consider include:
- Are employees remote working in a state where the business did not previously have nexus? New state and local filings and registrations may be required during or after the emergency declarations.
- Has the jurisdiction temporarily waived its nexus assertions due to COVID-19? If so, and for how long? Guidance may be tied to government-issued orders or a fixed date.
Business Tax Apportionment
Remote working may have an effect on how businesses apportion their taxable income. This can impact current tax payments and future liabilities. Some issues to consider are:
- Does it affect receipts sourcing? Remote workers may impact how receipts from sales of services are sourced, especially in states requiring cost of performance sourcing.
- Does it affect the payroll factor? Jurisdictions may require payroll sourcing to either the current work location, or the former employment location for remote workers and may differ from employer withholding.
- Have jurisdictions issued any COVID-19 related guidance and how long will it last? Such temporary sourcing rules may last only for a defined time period or only during the declared emergency.
Credits & Incentives
Many credits and incentives specifically reference job creation and/or retention at a specific location. The shift to remote working may impact businesses and their ability to meet these employment requirements. Impacted businesses should consider addressing these changes with the agency issuing the credits or incentives to take advantage relief provisions, or to negotiate changes to clawback provisions. Going forward, employment commitments should take into account the potential impacts of remote working
- Other considerations when dealing with remote working include:
- Does the company have the systems and data available to track the employee work locations in order to address the various issues discussed above? If not, what plans are being considered to obtain this information?
- Is the business required to register for local businesses taxes in the employee’s remote working jurisdiction?
- Must the business pay unemployment compensation to the state from which an employee works remotely?
- Must the business comply with another state’s worker’s compensation and disability insurance rules due to the employee’s presence there?
- Can employees deduct expenses for working from home?
In 2021, as the pandemic and its restrictions hopefully gradually ease, and temporary tax rules expire, the state and local tax implications of remote working may have a considerable impact on businesses. Many of these impacts will require businesses to carefully consider how to draft internal policy statements and employee and public communications about their remote work arrangement. Evaluating and planning for these issues now will help to avoid surprises for both employers and employees, while helping to facilitate work arrangements that can help position the business and employees in a favorable manner.
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