This year, the COVID-19 pandemic has brought upheaval to nearly every aspect of our lives, both personally and professionally. Virtually every sector of our society has been impacted. In response, companies were forced to quickly adapt or face near-certain failure as government mandated "stay-at-home" orders impacted millions of "non-essential"1 employees nationwide. As the pandemic wears on, employers continue to allow employees to work remotely.
Two important tax considerations employers should be aware of are:
- Does an employee that works from home in a state other than where the employer is located create enough of a taxable connection subjecting the employer to tax obligations in the employee's state of residence (i.e. employment tax withholding, unemployment tax obligations, workers compensation etc.)?
- What state is owed income tax because of the employee telecommuting or working from home?
While the tax treatment of employees working remotely affects every state, the issue is heightened in states with a large number of cross-jurisdictional commuters (e.g. New York, New Jersey, Connecticut, and Massachusetts). In a time when states are acutely aware of revenue shortfalls as a result of the pandemic, it is likely states will be proactive in recouping lost revenues by enforcing tax obligations on employers. Some states have provided temporary relief and specific guidance regarding these issues. Many, however, have remained silent, and thus pre-pandemic tax obligations are still in effect.
The following state-issued guidance (if any) regarding tax obligations should be followed by employers with employees working remotely:
- Connecticut – Out-of-state businesses ("OSBs") should operate under pre-pandemic requirements. Regarding income tax requirements, Connecticut follows the "convenience rule"2 and provides a credit to Connecticut employees for taxes paid to other states on convenience days. There has been no official guidance regarding whether days worked from home due to COVID-19 lockdowns will be treated as a "convenience."
- Maine – Maine issued a Tax Alert (ME Tax Alert #2, October 2020) stating that, "Maine income tax withholding for wages paid in 2020 to a Maine resident suddenly working in Maine due to a state's COVID-19 state of emergency, will continue to be calculated as if the Maine resident were still working outside the State." In addition, "[f]or tax years beginning in 2020, the Mills Administration will introduce legislation in January to ensure Maine residents avoid double taxation as a result of COVID-19 related telework by allowing the tax credit for income tax paid to other jurisdictions if another jurisdiction is asserting an income tax obligation for the same income despite the employee no longer physically working in that state." Individuals living in Maine for more than 183 days will be considered residents and are therefore subject to state income tax requirements.
- Massachusetts - Pursuant to Technical Information Release 20-10 provided by the Massachusetts Department of Revenue, dated July 21, 2020, an employee temporarily working from home in Massachusetts due to the COVID-19 pandemic will not by itself cause its OSB to be taxed in Massachusetts or be subject to Massachusetts employment tax withholding.3 However, employees working remotely for a Massachusetts employer will still be subject to Massachusetts income and employment taxes.
- New Hampshire – New Hampshire has not provided any guidance. OSBs should continue to operate under pre-pandemic requirements. New Hampshire does not have a state income tax. Note that New Hampshire has filed a Motion for Leave to file a Bill of Complaint with the U.S. Supreme Court challenging the constitutionality of Massachusetts's position since its residents are not commuting into Massachusetts.
- New York – New York just recently provided guidance (updating its residency FAQs) confirming that its pre-pandemic requirements continue to apply. For income tax purposes, New York follows the "convenience rule." Thus, an employee whose normal primary office is in New York is considered to be working in New York even if working remotely, unless the employer has established a bona fide office at the remote location. Generally, an employee's home office will not qualify as a bona fide employer office.
- New Jersey – The New Jersey Division of Taxation early in the pandemic stated for withholding tax purposes, "wage income will continue to be sourced as determined by the employer in accordance with the employer's jurisdiction." It directed employers to a reciprocal personal income agreement with Pennsylvania eliminating wage sourcing issues for employees and noted the two states will "not tax the wages of a resident of the other state." New York and New Jersey do not have a similar agreement. New Jersey is considering joining New Hampshire in its lawsuit based on New York's guidance since New York's rule will require many New Jersey residents to pay New York income tax even though they are no longer working in New York.
- Rhode Island – Rhode Island issued the following guidance related to the emergency regulation 280-RICR-20-55-14: "Under the emergency regulation, the income of employees who are nonresidents temporarily working outside of Rhode Island solely due to the pandemic will continue to be treated as Rhode Island-source income for Rhode Island withholding tax purposes. Example: A Massachusetts resident works for a Rhode Island employer, normally performs his tasks within Rhode Island, and has wages that are subject to Rhode Island income tax withholding. If the employee is temporarily working within Massachusetts due to the pandemic, the employer should continue to withhold Rhode Island income tax because the employee's work is derived from or connected to a Rhode Island source. Another part of the guidance involves Rhode Island residents who are employed by an employer outside of Rhode Island, and normally work outside of Rhode Island, but who are temporarily working remotely in Rhode Island. Under the emergency regulation, Rhode Island will not require employers located outside of Rhode Island to withhold Rhode Island income taxes from the wages of employees who are Rhode Island residents temporarily working within Rhode Island solely due to the pandemic. Example: A Rhode Island resident works for an employer in Connecticut, normally performs her tasks within Connecticut, and has wages that are subject to Connecticut income tax withholding. If the employee is temporarily working within Rhode Island solely due to the pandemic, the employer will not be required by Rhode Island to withhold Rhode Island income taxes from that employee's wages for the duration of the emergency.
- Vermont – Vermont has not issued guidance, however, a quote from the Vermont Department of Taxes stated: "[w]e have no intention of changing our audit program or focusing audit inquiries to identify workers working temporarily from home during the COVID-19 emergency. Regarding the income tax requirement, Vermont requires income tax to be paid to the employee's home state. However, for OSBs who have remote workers located in Vermont only on a temporary basis, (i.e. OSB employee temporarily moved from New York to Vermont to escape the city) Vermont will not require that OSB to change the employee's withholding state.
There has been some recent push from Congress to address these complicated tax issues, notably, The Multi-State Worker Tax Fairness Act,4 first introduced by the Connecticut Senate delegation in 2016 and recently revived by House Resolution 79685 by representatives from Connecticut and New Hampshire would restrict states' ability to tax nonresident telecommuters.
Until there is any decisive action taken by Congress or specific guidance provided by the states, the multi-state tax implications caused by the COVID-19 pandemic and the substantial shift to work-from-home practices, confusion for both businesses and employees regarding their tax obligations will remain. Although we have only addressed states located in the New England region, we are happy to answer questions regarding other states nationally.
1. "Non-Essential" employees are employees in jobs determined not to be "essential" during an emergency and are determined on a state-by-state basis.
2. Convenience rule requires income tax to be paid to the state of regular work for days worked from home for the convenience of the employee. So a CT employee working remotely for a NY employer would continue to be taxed as if working in NY. Six states - Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania use the convenience rule. During the pandemic, MA's temporary rules mirror the convenience test.
3. Such relief period at this time is extended to the earlier of (1) 90 days after the state of emergency in the state has been lifted; or (2) December 31, 2020.
4. Multi-State Worker Tax Fairness Act of 2016, S.2813, 114th Cong., 2d Sess., (2016).
5. Multi-State Worker Tax Fairness Act of 2020, H.R.7968, 116th Cong., 2d Sess., (2020).
Originally published November 4, 2020
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