COVID-19 and the Impact on Remote Work
The COVID-19 pandemic has drastically shifted the way employees “go to work” every day, meaning that remote work remains at the forefront of many workforce models. Nearly 45 percent of full-time U.S. employees worked from home, either fully or partly remote, in September 2021, with many employees wishing to continue working from home.
Unfortunately, many employers are often surprised to discover that a telecommuting employee will often result in becoming taxable within the state where the employee works – the truth is that administrative or other non-sales/customer-oriented personnel can establish nexus for a company, which is the nature and frequency of contacts of an out-of-state business within another state. Nexus laws continue to expand to impose a tax on out-of-state businesses based on several factors:
- Physical Presence – Applies if the company has a physical presence in the state.
- Public Law (P.L.) 86-272 – Prevents states from imposing income taxes on businesses whose only activities in the state are restricted to the “mere solicitation” of sales of tangible property, and does not apply to franchise tax, gross receipts tax, employment tax or sales tax.
- Economic Nexus – Applies if a connection exists between a business and another state outside of its physical presence, meaning the state using the economic presence can impose a tax on out-of-state companies doing business within the state.
- Factor Presence – States have imposed nexus upon companies that have exceeded certain thresholds of either property payroll and/or sales.
Physical Presence Nexus Considerations
The shift to telework may be permanent for many industries. As such, businesses will need to reevaluate their geographic footprint as many employees are not working at their assigned office locations. If employees are working across state lines that are beyond the company’s pre-pandemic boundaries, then consider whether the presence of those employees could trigger physical presence or other nexus in new jurisdictions, potentially creating a host of costly new tax compliance obligations.
Special COVID-19 Nexus Considerations
Some states within the U.S. have released guidance providing that the presence of remote employees due to COVID-19 will not by itself cause a taxpayer to establish nexus in the state. In certain cases, nexus relief is only available during the official state of emergency period or another state period. Therefore, taxpayers should evaluate where the workforce is currently located, and which states have issued guidance that could cause an impact.
Regarding expiring nexus relief, the application of pre-COVID-19 nexus standards are back, with some states issuing specific guidance, including California, Connecticut, Indiana, Maine, Massachusetts, Oregon, Pennsylvania and South Carolina – states that have been “silent” on the issue should be assumed to assert nexus whenever possible.
Income Tax Considerations
If a company is conducting business in a new state(s) for corporate income or franchise tax purposes, it should consider the impact upon its multistate apportionment. Regarding absent special relief for states that utilize payroll and property factors, the presence of employees or company property in a new jurisdiction may impact the apportionment formula. Consider also whether a company’s sourcing of receipts may be impacted – in states that utilize cost of performance sourcing for sales revenue, a shift in workforce location could potentially affect the location where services are performed.
Residency and Domicile Considerations
If an individual is domiciled in one state and a statutory resident in another state, that individual will be subject to tax on all sources of income that such states subject to a personal income tax. Statutory resident states may have a higher tax rate, and credit for taxes paid to other states is limited (i.e., wage income).
Unfortunately, changing domicile is not as easy as relocating from a home in one state to another in a different state to telecommute. Many states, like New York, are now aggressively auditing claims of domicile change, meaning that successful change of domicile requires the intention to relocate permanently, proven by objective evidence.
Employer Considerations for Employment Tax
Employees physically working in a location different from their regularly assigned workplace due to COVID-19 could create an obligation for employers to withhold and report income tax on wages earned. In such a case, the employer may be required to register for a withholding account if it was previously an out-of-state employer with no presence in the state. Employers may also need to consider other payroll implications such as unemployment, disability and workers compensation insurance in the employee’s remote location.
Employers must withhold tax in states where they have nexus and are subject to withholding laws and thresholds within that state. The state in which the employee works is typically the default for withholding based on the following:
- Employee lives and works in the same state.
- Employee lives in one state but works in another.
- Telecommuting.
All states within the U.S. have varying withholding thresholds. For Georgia, the employee must be in the state for more than 23 days in a calendar year, or if $5,000 or five percent or more of the total income for the employee is attributable to Georgia. For a list of threshold requirements for other states, you can reach out to us for more information.
Employers can prepare for upcoming uncertainty by engaging in the following:
- Regularly monitor the locations of current and new employees.
- Know your employees’ job responsibilities.
- Continuously evaluate each state’s nexus rules for income, gross receipts, sales, employment and other taxes.
- Determine exposure and/or initiate filings.
For more information about economic nexus and state tax obligations, contact your Windham Brannon advisor or reach out to Tim Clancy.
