Some employers have moved their employees to telecommuting status as a result of coronavirus and shelter in place requirements. And that means that someone could now work from home in one state and actually provide work for the business in another state.
It gets even more complicated if a worker moves outside of the general geographic area. Adjoining states may have agreements already in place due to regular commuters. But with teleworking, people may move far away from their regular job, and yes still work the same job. There is a lot more to work out.
Having employees working from home or telecommuting from another state may create a business presence in that state by establishing nexus. Nexus means connection. Where there is nexus, there is almost always some kind of tax obligation.
If state income tax nexus is established in another state by a telecommuting employee, the employer will have to register as a state employer and withhold state and local payroll taxes.
Also, having an employee in the state may be enough to establish that the nonresident employer is now doing business in that new state. And that means business income tax, sales tax, franchise tax and more. As you can see, it becomes a slippery slope. Once you have one type of tax obligation, it can open the gate to many more. Generally speaking, wages are subject to state tax in the state where the employee provides the work. If you live in State A and commute to State B to provide the work, State B is where the work is performed. You will have personal state tax liabilities to State A because you live there, but that’s between you, as an employee, and the state. It does not involve your employer.
But what happens when you telecommute from State A just like we’re seeing with teleworkers do in the time of COVID 19? In that case, there are two factors to consider.
First, does a reciprocal tax agreement exist between the states? Secondly, are the states subject to the “convenience of the employer” rule?
The “convenience of the employer” rule means that the employee is working at home due to the employer’s preference, not necessarily the employee’s preference. It’s a pretty vague rule, though, because generally arrangements like this are convenient for both the employer and the employee.
In the case of work-from-home rules, is telecommuting for the convenience of the employer or the employee? It could actually be neither. It’s just the law.
If an employee works from home, does it then mean that the employer, in another state, is now required to withhold state taxes for the employee home state? In the case of a physical commute, the employer has no responsibility, but if work is performed in the employee home state, circumstances have changed.
In most cases, we have to look at the specific states involved to see if there is a reciprocal tax agreement in place. If such an agreement exists and it requires the employer to collect and pay the state withholding on behalf of the employee in the home state, it also means the employer has to register as an employer in that state. That means a whole lot more paperwork and fees.
Some states have already dealt with the issue by putting nexus relief provisions in place to create safe harbors. However, the number of teleworkers has increased substantially and right now, states have other issues to deal with such as crippling unemployment, dramatically reduced staff and budget and their own “shelter in place” rules.
Like most tax questions, the answer is “it depends” when it comes to determining how two states determine tax obligations. It is something that will need to be addressed soon, though, for both the employer and the employee.