Businesses derived many lessons as a result of the pandemic, from learning to pivot quickly to embracing innovative approaches to production, delivery, and responding to market needs.
Perhaps one of the most significant lessons learned was the ability to utilize remote workers to perform certain job responsibilities. As businesses return to the office, they are discovering that employees expect more flexibility than before, causing many companies to consider making some remote work assignments permanent. However, for companies allowing employees to continue working remotely, this can result in some unexpected state and local tax consequences. Employees working remotely on a permanent basis will require employers to reevaluate their state and local tax filing obligations such as employer withholding, income tax, and sales tax.
When businesses were ordered to shut down last year and workers began telecommuting, states responded by easing rules related to nexus. Many states issued guidance stating that employees who were telecommuting because of a work-from-home order would not create income tax nexus for the employer. However, that relief did not necessarily extend to employer withholding and employers were caught in the cross hairs of state disputes regarding the sourcing of wages for withholding purposes.
As states have reopened, the adoption of taxpayer-friendly guidance and suspension of traditional nexus rules are ending and states are returning to pre-pandemic rules. Employers should expect that the presence of employees working remotely will result in nexus for the employer and will need to understand new state tax obligations in areas like income taxes, sales tax, and employer withholding.
Many states source wages to the state where the work is performed. However, some states and municipalities, such as Pennsylvania, Delaware, Connecticut, New York, and the City of Philadelphia, utilize a “convenience of the employer” rule. This rule states that if an employee is working in another state for their own convenience, their wages are still subject to tax in the employer’s primary location. Employers located in one of these municipalities should adopt clear guidance as to the work assignment of its employees.
For example, a business that is located in Philadelphia (a city that utilizes the convenience of the employer rule for sourcing wages), but allows its employees to choose whether to work remotely, will likely still be required to collect the City Wage Tax on 100 percent of wages paid to all residents and non-residents.
As we continue to navigate this new environment, employers should assess their withholding policies to make sure they are in compliance with state and local reporting requirements. Some employers will have an easier time because of reciprocity. However, others with employees working remotely from non-reciprocal states will have to determine how the home state as well as the work location state source wages.
Employer withholding involves a number of factors such as the physical location of the business, remote worker locations, reciprocity, and state rules. Administrative burdens, as well as other tax considerations, may force employers to incur significant compliance costs.
The path forward for employers is not clear and any decision deserves careful consideration. An employer also needs to consider other taxes imposed by the state where the remote worker is located, such as income taxes. Ultimately, employers should carefully evaluate all of the facts and circumstances when deciding whether to make remote work a permanent option for employees.
Need assistance determining the potential state tax implications of allowing your company’s employees to continue working remotely? Contact Kreischer Miller’s State and Local Tax Strategies group. We can help you determine the potential impact to your business.
Click here for more information about our State and Local Tax Strategies services.
Kreischer Miller is a leading independent accounting, tax, and business advisory firm that serves the Greater Philadelphia and Lehigh Valley areas. We’ve built our firm to respond to the unique needs of private companies, helping you smoothly transition through growth phases, business cycles, and ownership changes. The companies we work with quickly adapt and respond to changing market opportunities and challenges. That’s why our focus is on being responsive, decisive, and forward-thinking. We’re up to the challenge—always looking at the road ahead, not in the rear-view mirror. Click here to learn more about Kreischer Miller.
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