The pandemic has undoubtedly changed the landscape for employers and employees, one area is the proliferation of remote workers. Working remotely is not a new concept, but it is now commonplace due to stay-at-home orders kickstarting the remote work movement. While restrictions have eased and many have returned to the office, there is a trend of employers maintaining their remote work policies. This new wave of remote workers may trigger different tax issues for business if they have employees working in a different state than the location of their business. Determining possible tax and payroll issues is very state and fact specific. There is further a greater level of complexity when remote workers who reside in one state then temporarily reside in another and continue to work remotely.
As a general rule, state income tax withholding is required in the state where the employee’s services are performed. This can make things complicated when employees work remotely in a state other than where the employer is located. In many states, an employee may be subject to income tax for working in a state for only one day, further creating a withholding requirement for the employer. Other states do not subject an employee to income tax withholding until they have been working in the state anywhere from ten days to two months.
Currently, many states have temporarily issued guidance which direct employers to continue withholding income tax from employees based upon their normal work location even if they are working remotely in another state due to the pandemic. This guidance is only temporary and many employers who chose to continue to maintain a remote workforce will soon have to comply with other states’ income tax withholding requirements.
Additionally, a business may be subject to a state’s income tax and reporting requirements if a nexus is established in that state. There are three factors to determine if a business establishes a nexus in a state: property, payroll, and sales. An employee usually will not create a nexus for its employer when the employee lives in a different state, however, in many states an employee working remotely at home in another state will trigger a nexus. With a proliferation of remote employees working in other states, businesses can be subject to income and franchise tax and sales and use tax obligations. For assistance navigating the tax implications associated with a remote workforce, please contact PLDO Attorney Katherine D. Bishop at 401-824-5100 or email kbishop@pldolaw.com.
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