Whose Convenience Generates State Income Tax Withholding Headaches?
With lock-down orders and social distancing rules in effect, many companies have transitioned their workforce out of the office and into working from home or other remote locations. While initially thought to be a temporary phenomenon, many companies are starting to consider more liberal remote work location policies as workers have proven that a more geographically dispersed workforce is not necessarily the hindrance to business operations that it was once thought to be. As this transition continues, a key question is in which state(s) income taxes should be withheld when employees are now working in different states from that of the office location. This issue is particularly pertinent in the Northeast, where employees often reside in one state and commute to another, but also more broadly as companies relax their mobility policies to allow greater freedom for long-term remote work. As state- and local-level shutdowns ease, employers will need to address when “required” turns into “voluntary” and when “temporary” turns into “permanent”.
Convenience of the Employer Rules
Generally, employers are required to withhold income taxes in the state where the employee performs services; as such, office-based employees are generally subject to tax withholding for the state in which the office is located. However, some states tax wages earned by employees residing in one state, but performing services in another state, and some of those states also impose a withholding obligation on the employer.[1] Therefore, the proper withholding treatment depends on both the resident and working states involved, and therefore must be analyzed based on the particular circumstances involved.
With the transition to working from home and remote work locations, the frequency of these questions have drastically arisen as companies that are struggling with liquidity do not want to be subject to penalties for not appropriately withholding
Unfortunately, there is not a uniform answer to this issue. To add to the complexity, Connecticut, Delaware, Nebraska, New York, New Jersey, and Pennsylvania have a “convenience of the employer rule”: if the employer is requesting that the employee work in a different jurisdiction, then, for state income tax purposes, the employee is subject to withholding based on the location of the second location.
On the other hand, if an employee chooses to work in another location (e.g., their home) for their own convenience, then the employee’s wages are subject to withholding based on their “assigned” location as opposed to the actual location they worked under the convenience of the employer rule.
However, the application of the rule is not necessarily clear as lock-down orders are eased and businesses begin to re-open: employers are faced with determining at whose convenience is the employee working at a secondary location? In the case of mandatory shutdowns, the application of the rule is clear, as companies are generally requiring employees to work from their home (or other remote) locations. However, the application is less clear as mandatory shutdowns end with companies allowing employees to continue working remotely if preferred.
COVID-19 Related State Income Tax and Withholding Guidance
While many states have now issued guidance in an attempt to clarify the applicable withholding requirements, not all states have done so and the approaches from states that have provided guidance are not necessarily aligned. This leaves a large amount of uncertainty with regard to the applicability of the various state withholding requirements, particularly as multiple states may be involved (e.g., an employee that works out of multiple locations during the shutdown), including states in which the employer may not have an established income tax withholding account. As noted above, depending on the applicable jurisdictions, withholding requirements may overlap, necessitating income tax withholding for multiple states for an employee.
The following is a summary of the states that have provided COVID-19 related guidance to date:
| State | Guidance |
|---|---|
| Alabama | Employees that are temporarily working in Alabama due to COVID-19 are generally not subject to Alabama withholding. |
| Georgia | Employees that are temporarily working in Georgia due to COVID-19 are generally not subject to Georgia withholding. However, wages that would have otherwise been Georgia wages are subject to Georgia income tax. |
|
Illinois |
No changes to the new withholding requirements that went into effect on 1/1/2020. |
| Iowa | No changes to withholding requirements due to temporary work relocations. |
| Kentucky | For Kentucky state income tax purposes, employers employing Kentucky residents, and/or nonresidents who reside in states with which Kentucky has a reciprocal agreement, will not need to change their current withholding practices during the period when these employees are working from home. Requirements for withholding of tax, in either case, remain unchanged by restrictions related to the COVID-19 public health emergency. |
| Massachusetts | Nonresidents otherwise working in Massachusetts but currently working remotely will continue to be subject to state tax withholding. Resident employees who regularly work out of state but are now working in the state as a result of COVID-19 are not subject to Massachusetts income tax (so long as the employer continues to withhold for other states). |
| Maryland | Temporary work performed in Maryland will not be subject to Maryland withholding tax but will be considered Maryland wages subject to tax. |
| Minnesota | Minnesota residents continue to be subject to income tax and withholding on wages earned both inside and outside of the state. For non-residents, temporary work within Minnesota will be considered Minnesota wages subject to apportionment and withholding. |
| Mississippi | No changes to withholding requirements due to temporary work relocations. |
| Nebraska | No changes to withholding requirements due to temporary work relocations. Work location changes will not be required until January 1, 2021. |
| New Jersey | New Jersey does not require employers to change previously established state withholding in payment systems for employees now telecommuting or temporarily relocated to a work location outside of New Jersey due to COVID-19. However, employers must consider their unique circumstances and make that decision. |
| New York | New York Senate bill S.8386 proposed that employees working outside the State (or City) during the pandemic (defined as the time period covered by New York Executive Order 202, March 7, 2020 to September 7, 2020) should be deemed to be doing so as a matter of necessity rather than for the employees’ convenience and, thus, those workdays should not be attributed to New York State (or City). The bill has not yet been based, and to date, the New York Department of Tax and Finance has not issued guidance pursuant to COVID-19 creating uncertainty as to how the Department will treat employees working remotely for withholding purposes. |
| North Dakota | If telecommuting is attributable to a COVID-19 related response and is intended to be temporary, North Dakota will not require withholding tax or the inclusion of that payroll in the numerator of the payroll factor. |
| Ohio | Employees required to work remotely due to COVID-19 are considered to continue working at the principal place of work without such days being considered for application of municipal taxes. |
| Pennsylvania | No changes to withholding requirements due to temporary work relocations. Note, the City of Philadelphia has also indicated no changes to its withholding requirements due to temporary work re-locations. |
| Rhode Island | No changes to withholding requirements due to temporary work relocations. |
| South Carolina | No changes to withholding requirements due to temporary work relocations through September 30, 2020. However, this does not apply to work whose location status changes from temporary to permanent during this period. |
| Vermont | Employees that are temporarily working in Vermont due to COVID-19 are generally not subject to Vermont withholding. However, wages that would have otherwise been Vermont wages are subject to Vermont income tax. |
Alvarez and Marsal Taxand Says
In addition to understanding the specific withholding requirements of the states involved with the workforce population, it will be crucial for employers to determine when COVID-19-related work from home arrangements are no longer considered temporary, resulting in any COVID-19 related exceptions no longer applying. While this issue may primarily impact companies in limited geographies were residing and working in different states is more common, as companies provide more flexibility to work remotely on an ongoing basis this issue will need to be analyzed for workforces that historically have not triggered such considerations. Lastly, other business considerations, such as sales and income tax nexus, may be implicated as companies now have workforces operating in states where the companies previously had no taxable presence.
A&M Taxand recommends reviewing employee mobility and withholding policies in light of COVID-19- related changes to workforce population locations. A&M Taxand can assist in evaluating employee population locations to determine the appropriate mobility and withholding requirements, developing location change policies, and determining whether other potential nexus issues are triggered.
[1] The amount of the tax in the employee’s resident state varies by jurisdiction, ranging from the incremental difference between the resident state and the working state, the full tax, or only subject to tax absent a reciprocity agreement or if the wages are not subject to tax in the working state.
