Back in May, as companies were working out some of the logistical kinks of having employees work remotely, The Wall Street Journal published this article, "Remote-Working From a Different State? Beware of a Tax Surprise." It was a good reminder that each state has a unique set of rules that consider:
- how long a worker is there
- how much income is earned from there
- where the worker's true home (domicile) is
In general, you pay taxes based on where you work or earn income. Most states have income taxes imposed on workers working from there and in about two dozen states, this tax can start from Day 1. Companies may have an obligation to withhold and pay out the taxes to those states. As an example, an employee in San Francisco who breaks their lease and moves home to Chicago to live with family for a while may need to file tax returns and perhaps pay taxes there. A banker from New York who sets up a desk in their Florida beach home from March through December may have a more complicated filing.
The reality is that an employee may owe taxes in two locations. While some states do have pacts or agreements so as not to duplicate the tax burden on the same income, it could mean they’re subject to tax withholding in the state where they’re working remotely, as well as potential non-resident income tax return filings. However, the employee would typically receive a tax credit.
Here's advice to any worker leaving a state you were working in and working remotely from another state on a long-term basis: understand how the new state you’re working from will treat the income.
On top of that, as Craig Anderson explains in this article through Worldwide ERC, individuals may not be the only ones that should be worried about a tax consequence:
"Employers can also be greatly affected due to the impact of employees working in states away from established business locations including:
- Payroll tax withholding for earnings in employees’ home state
- Registering with states where employer may now have a physical presence
- Annual reporting, Franchise Tax or Sales/Use Tax obligations
- State income tax liability
- Workers compensation and unemployment insurance
Additionally, companies will likely experience increased internal cost associated with tracking employee movement between multiple states for payroll, and the additional costs with more state filings and allocation of earnings for state income tax."
Many U.S. states assert that an employee working from home within those states gives the employer “nexus” with the states for tax purposes, even if the employer does not have a facility or own property in the states. However, some states have made temporary changes to their normal tax policy due to the pandemic. For a summary of state guidance related to COVID-19, check out this document. Regardless of reciprocity or pandemic guidance, employees may still have a state and local tax obligation, even if employers are not required to withhold.
For companies seeking more guidance, checkout these AICPA recommendations for administrative, filing and payment relief for state and local taxes during the pandemic.
The big takeaway? There may be significant, unexpected state tax implications, and there is a potential tax risk for both individuals and their employers. Even the presence of a single employee in a state could result in a company being subject to tax obligations in a location where it had no prior filings or did not conduct business in the past.
The COVID-19 pandemic has fundamentally changed the way that employees work. Having a presence in office buildings has quickly been replaced by solutions such as ‘working from home’, and could soon be effectively replaced again by ‘working from anywhere’ – an option which had seemed impossible in Romania a year ago.