As COVID-19 cases decline across the U.S., some states are ending their safe-harbor tax provisions for remote workers and their employers. When lockdowns began across the country in 2020, these safe harbors ensured that remote workers living in states that were different from where their office is located would not be subjected to that state’s personal income tax. This also provided a benefit to employers, as they would not be required to withhold or remit payroll taxes, register to do business, or start filing taxes in the states their remote workers were located in.
As more offices continue to re-open, many are implementing permanent remote work policies. With many states beginning to end their safe harbor provisions, experts are advising companies to strategize about the tax implications of providing a “work-from-anywhere” policy to their employees. For major firms with physical locations in multiple states, this may not be a huge change. But for small businesses that are based in one state, the loss of the safe harbors could possibly lead to larger tax bills and new administrative challenges.
Businesses can enact new practices to counter the issues that may arise from having remote workers in multiple states. Some ways for employers to embrace remote work and ensure minimal tax issues include:
Some states in the Mid-Atlantic, such as Maryland and Virginia, made no changes to existing nexus policies for COVID-19. Any state with no reciprocal agreement with Maryland needs to withhold taxes for employees working in Maryland, in office or teleworking. Any out of state employee receiving Maryland income will also be subject to withholding.
Other states in the Mid-Atlantic did make changes to their tax provisions for remote workers. For example, the District of Columbia will not establish nexus solely on the presence of remote workers located in the District during the period of a public health emergency. As of October 8, 2021, the District will continue its state of emergency until January 7, 2022. Pennsylvania ended their safe harbor provision on June 30, 2021, and now nexus provisions are as usual. For Delaware, after June 1,2020, the state in which a remote employee is working from is the one that can tax their income. Any days teleworking outside of Delaware is treated as out of state income if an employer directed its employees that they cannot work at the Delaware location or if employee needs to seek advance permission to return in person.
UHY will continue to monitor these and any other tax law changes and provide updates as new information is released. If you have any questions about how this affects you, please reach out to a UHY professional.