11.18.21 – Bloomberg Law
Nearly half—45%—of full-time U.S. employees worked from home all or part of the time in September, according to Gallup. Those numbers were the same as those in July and August, suggesting that workers may be settling into a new normal.
As employees increasingly embrace the idea that work doesn’t always have to happen inside of an office building, some employers are struggling to adjust. Beyond the obvious—tech and communications issues—employers must sort out tax issues that aren’t quite so obvious.
Income Tax Rules Vary
Working at home in one state when your company is located in another state may mean that you’re subject to tax in both places.
For example, if you live in Pennsylvania, but normally work in New York, you may have to file a resident tax return in Pennsylvania and a nonresident tax return in New York. You typically would file and report income to the state where you work and then claim the credit on your resident tax return.
It’s easier when you live in a state that has reciprocity with the state where you work. In that case, you would file and pay only in your home state, and you don’t have to pay taxes—or even file—in the state where you work. So, if you live in Pennsylvania but work in Virginia, your employer would withhold tax for Pennsylvania, while Virginia would take a pass. In addition to Virginia, Pennsylvania has agreements with Indiana, Maryland, New Jersey, Ohio, and West Virginia.
But not every state has reciprocity with multiple states. New Jersey, for example, has reciprocity with just one state: Pennsylvania.
And most states don’t offer reciprocity at all.
It gets more complicated when states have different tax rates and residency rules. While Wynne v Comptroller of Md. confirmed that two or more states can’t tax the same earnings, you may have to file tax returns—and possibly pay—in one or more states to ensure that you’re paying the correct amount of tax to the right place.
And you may not even have to cross state lines for things to get complicated. Many states—like Pennsylvania—are made up of numerous townships and municipalities that may also impose tax depending on your location.
Getting the withholding right could mitigate issues at tax time, even if some tax is still owed. So whose responsibility is it to get it right? Your employer? That assumes that your employer knows—and intends to comply with—the rules in multiple locations.
Work From Where?
When employees are required to check in with their employers through the use of scanned badges or time clocks, there is confirmation of their physical location. Other employees, including attorneys and accountants, may have already been used to recording their workplace on time sheets—as an attorney in Philadelphia, I know that this was something that I was very used to doing.
But workers who may now be at home—or another location—aren’t necessarily used to confirming their location.
During the pandemic, since it was impossible to go into most offices, some states offered variations on relief, including the option to continue withholding at the employee’s prior work location. But with the pandemic easing, that’s not an option for all employers.
Now, many employers ask their employees to establish their primary location upfront and let the company know if that changes. Others require employees to record their location each time they log in to a network. Still, others are considering new technology which records physical presence with biometrics.
No matter the approach, it’s clear that employers will increasingly need to know where workers are located to ensure that they’re doing proper withholding—not to mention the imposition of the correct unemployment, worker’s compensation, and other payroll-related deductions and benefits.
Exposure to Other Taxes
When it comes to other kinds of taxes, states typically look to nexus. Nexus is a legal term for a connection; it’s important in the tax world because, under the Constitution, states must establish a connection between a taxpayer and the state to impose taxes.
We’ve been talking about nexus and sales tax for years. The idea that you could only impose sales tax on sales where a retailer maintained a physical presence in a state had previously been established in National Bellas Hess v. Illinois Dep’t of Rev. and was affirmed in Quill Corp. v. North Dakota. But with the rise of the internet, states took varying approaches to nexus, raising the question of whether Quill deserved a second look. The Supreme Court tackled that issue in South Dakota v. Wayfair, Inc., ruling that states have broad authority to require online retailers to collect sales taxes.
That has some employers worried: If their employees are routinely performing work in states where the employer otherwise doesn’t have a presence, could that create nexus? A cash-strapped state legislature could say yes.
The same issue applies to corporate income and other business taxes. If nothing else, remote workers who are out of state could impact apportionment factors since those are typically based on property, payroll, and sales factors.
That might be routine maintenance for Amazon or Microsoft. But what about small-to-mid-sized businesses? If they allow workers to work from home or another state, could that create an expensive and complicated tax compliance nightmare?
Revenue Departments Are Overwhelmed
And while state revenue departments may crave the revenue, let’s be honest: Not all state and local revenue departments want remote workers to be fully compliant. Many revenue departments are already struggling to work through pandemic-related backlogs. Adding zero or credit-only returns—or new tax returns—to the pile could prove to be overwhelming.
No National Standards
There is currently no national standard for the withholding, filing, and payment of state income taxes for employees who work in more than one state or work in one state and live in another.
In nearly half of the states, nonresident employees may incur a tax liability on the first day, with employers taking on a related withholding obligation.
And in five states—Connecticut, Delaware, Nebraska, New York, and Pennsylvania—there’s a “convenience of the employer rule” which imposes tax on nonresident employees who work remotely for employers with a presence in the state.
Together with reciprocity, exemptions and changing thresholds, taxpayers have to be on their toes to be compliant.
Pending Legislation
For the past decade, the Council On State Taxation—or COST—has pushed to pass the Remote and Mobile Worker Relief Act. Under the Act, no state would impose personal income tax on wages except for the employee’s state of residence, or the state in which employee is “present and performing employment duties” for more than 30 days.
Variations on the bill have passed the House three times. It has yet to become law.
According to Doug Lindholm, President and Executive Director of COST, one congressman has consistently opposed their efforts: Senate Majority Leader Charles Schumer (D-N.Y.). There has not been, says Lindholm, significant opposition from any state other than New York. When asked about the bill, Sen. Schumer’s office didn’t respond to a request for comment.
COST has decided to try another approach—rather than pushing federal legislation, it is now reaching out to individual states. Progress has been slow. While some states like Illinois support the idea, the real benefit to states exists when there’s critical mass: For a state-by-state effort to work effectively, every state needs a reciprocal provision.
Remote Work Is Here to Stay
With more than 90% of U.S. workers hoping that they will be able to work at home in a hybrid or fully remote capacity in the foreseeable future, it’s clear that some kind of a resolution is necessary.
As remote work attitudes continue to evolve, employers will be forced to re-examine their policies. In addition to immediate tax and withholding considerations, employers and employees need to consider tax-related issues tied to remote work, such as reimbursement programs, including tax compliance services.
A more simple tax solution would ease many concerns, but, getting there is proving to be difficult. As Scorsese has said, “Simple is hard.”
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.
To contact the reporter on this story: Kelly Phillips Erb in Washington at kerb@bloombergindustry.com