State Income Tax Considerations - Teleworking in the COVID-19 Era
Telecommuting in the United States has grown in the past two decades, with the emergence of the internet and the modern computer age. This business practice increased dramatically in 2020 as state and local governments implement “stay at home” orders to slow the spread of the COVID-19 virus.
Consequently, businesses now have employees working from home in states where they formerly did not maintain any workers.
Telecommuting workers could create income tax “nexus” in states where employees live OR work
Employers can be subject to business income taxes in a state when certain employees are working in the state. As a result, a telecommuting employee in a state different than the state where the business is located could create state income tax “nexus” for the business in that employee’s state of residence.
Employees who live and work in different states could possibly be taxed in both states - in certain situations. Therefore, a telecommuting employee could be subject to income tax in their home state and the state where their employee is located. Fortunately, some, but not all, states allow a resident state tax credit for income taxes paid to another state. In addition, some states have reciprocity arrangements with neighboring and other states that establish which state should collect income taxes from the employee. Pennsylvania has reciprocal agreements with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia. Under these reciprocal agreements, a PA resident working in NJ will only pay income taxes to PA. However, for employees that do not have the benefit of resident tax credits or are not in a state with a reciprocal agreement telecommuting could result in double taxation.
Fortunately, several states are addressing the issues regarding the state income taxation of telecommuting workers.
Summary of recent state guidance on telecommuting
The following is a summary recent guidance from states regarding the treatment of telecommuting employees:
- Pennsylvania has issued guidance that will remain in effect until June 30, 2021, or 90 days after the Proclamation of Disaster Emergency in Pennsylvania is lifted, whichever is earlier.
- If an employee is working from home due to the COVID-19 pandemic, Pennsylvania will not consider this a change to the source of their compensation. If the employee is a non-resident of Pennsylvania but was working in the state prior to the pandemic, their compensation will remain sourced to Pennsylvania for tax purposes.
- Conversely, Pennsylvania employers with non-resident employees who are temporarily working from home, should continue to withhold on their compensation.
- New Jersey has announced that employers will not be deemed to have corporation income tax nexus as a result of employees working from home due to the COVID-19 pandemic.
- District of Columbia issued a notice that the Department of Tax and Revenue will not seek to impose corporation franchise tax or unincorporated business franchise tax nexus as a result of employees temporarily working from home during the period of declared public emergency.
- Indiana Department of Revenue issued a FAQ that they will not use someone’s relocation as a direct result of temporary remote work arising from the COVID-19 pandemic as a basis for establishing Indiana nexus. This temporary protection is in effect during the periods of time when there is an official “stay at home” order or if an employee has a diagnosis of COVID-19, plus 14 days to allow for return to normal work locations.
- Minnesota Department of Revenue announced that it will not seek nexus for any business tax solely because an employee is temporarily working from home due to COVID-19.
- Maryland issued a notice that they will consider the temporary nature of a business’ workplace change in making nexus determination for income. The notice included an example that if a business is in Delaware with an employee who lives in Maryland, they have a requirement to withhold for Maryland income tax as they do not have a reciprocal agreement with Delaware. Residents of Virginia, Washington, D.C., West Virginia, and Pennsylvania, who earn income in Maryland, are exempt from Maryland withholding, because they have a reciprocal agreement.
- Massachusetts Department of Revenue issued Emergency Regulation 830 CMR 62.5A.3, effective March 10, 2020 that lasts through the date on which the Governor gives notice that the state of emergency is no longer in effect. The regulation states that a non-resident of Massachusetts who worked in the state before COVID-19 and is now telecommuting, will continue to have Massachusetts withholding from their compensation. However, a resident of Massachusetts who was working out of the state pre-COVID-19 and is still having out of state withholding from compensation while working from home will be eligible for a tax credit.
We will continue to monitor and report on telecommuting guidance received from these and other states.
One thing appears to be certain: while telecommuting was progressing before the pandemic, it is definitely here to stay and will impact taxation for the foreseeable future.
Please contact your Herbein tax advisor if you have any questions or need assistance with this matter. Article contributed by Emily Nolt. Contact the author at firstname.lastname@example.org.