A year into the pandemic, many employees have fled their home states to work remotely out-of-state. These employees have been working “remotely” in states in which their employers have no operations. So what’s the problem?
State and local taxes and employment laws, of course.
This blog is part one of a two-part post and will look at some of the tax and employment law issues that can arise when employees “work from home” in different states. Today, let’s discuss taxes. Next week, we will look at how state employment laws apply to remote employees.
Tax laws vary by state, county, and city. Many states require businesses operating in their state to register and pay business taxes. On the employee side, states (and some counties and cities) require employers to pay employment-related taxes and collect state and local tax withholdings from employees working “in” that state/county/city.
Questions arise when an employee works from home (e.g., second home or family member’s home) in a state where the business otherwise does not have operations. Is the business now operating in the employee’s “work from” state and required to register/pay business taxes? Is the business required to pay unemployment and state tax withholdings in the employee’s temporary work state?
Unfortunately, there is no single answer that applies to every situation. It is a state-by-state determination for income tax withholding, income tax reporting, unemployment and business considerations. Let’s start with the broad, general rule: An employer has tax and business registration obligations in the state in which the employee is physically present while working, regardless of the employer’s location. The employer must withhold from the employee’s wages in compliance with the remote state’s rules. That may come as a surprise to employees who come from no-tax states e.g. Florida and Texas who decide to work in a state that assesses income tax, e.g. Georgia or New York.
It may be difficult for states in which remote employees are providing services, away from their employer’s place of business, to monitor whether workers are providing services in the state. However, the issue may hit their collective radar if/when the employee seeks unemployment benefits (if laid off), files a workers’ compensation claim (yep, injured at home!) or if the employee actually files an income tax return in that state. Some states are realizing that they are losing money or, at least, cash flow from reduced income tax withholding and may seek to capture taxes from employees working from home in their states.
But rather than taking the “who knows what different states will do” approach, employers may want to take steps toward compliance including:
- Determine where your employees are working. Many employees have moved since the pandemic began, particularly remote workers. Make sure you know where your remote employees will be working.
- Determine whether any state or local withholding requirements apply. If you use a third party payroll provider, that provider may be able to assist in processing these withholdings. You also want to make sure you properly pay any required unemployment taxes.
- Determine if you have any other state registration or other business tax requirements due to the presence of one or more employees in the state(s) with remote workers.
If you will make deductions from an employee’s pay for state or local taxes, you should notify employees in advance. You do not want to field the phone calls (or worse) from irate employees whose paychecks have unanticipated deductions.
Whether the presence of a remote worker is sufficient to trigger business registration or state corporate taxes is a more complicated question. Some states have announced that the mere presence of remote employees will not create sufficient nexus to tag the employer with the “doing business in the state” moniker. Other states have not been pandemic-generous and have taken that position that any presence is sufficient. Still, other states have dollar thresholds of payroll that trigger liability. We expect significant litigation in this area similar to litigation in recent years over sales taxes for online purchases.
Remote workers can be problematic from an employment law standpoint as well. States have varied laws regarding overtime, minimum wage, discrimination, and other employment matters. These laws may apply to remote workers located within the state even if the business is not otherwise located or registered to do business there. Part two will look at some of these laws and provide some suggested best practices.