It’s been two years since COVID-19 forced many employees to work from home. And while some employees have returned to their offices and workplaces, there are others who will continue to work from home full-time or work a hybrid schedule.
For the business, remote working has had an impact on culture, performance, and staffing. And many are finding out it has also had a substantial effect on state tax nexus. As work from home becomes the new normal, these issues will only grow in significance.
During the height of the pandemic, many states provided temporary safe harbors related to teleworking and additional state tax obligations (both withholding obligations and nexus business income taxes). Most of these safe harbors have now expired and there are inconsistencies from state to state. Businesses with employees who reside in a different state are struggling to understand their tax nexus footprint.
Generally, a business is subject to a state’s income tax laws when its employees work in that state. At the same time, a company that does not have any offices or other operations in a state could find itself subject to the state’s income tax laws if remote workers reside in a different state.
In addition to taxes imposed on business income, employees who live in a different state than their employer impact withholding and unemployment obligations. Some states have reciprocity agreements that ensure individuals working across a state line are only subject to individual income taxes where they live, but there are other states where the guidance is muddy and confusing.
Employers should pay close attention to tracking employee locations for payroll tax withholding, sales tax, and business tax purposes. Sometimes, employers lack the proper resources and systems to track employee travel and work locations daily for purposes of accurate payroll tax withholding and reporting. These deficiencies can now lead to broader tax problems, such as income and sales tax liabilities.
The shift to remote work, which appears permanent for some, should give employers plenty to ponder. State income tax, sales tax compliance, withholding and other business tax policies and procedures are complex and sometimes conflicting from state to state. Companies should lean on their state and local tax specialists from UHY to help with this evolving situation.