Be Aware of These Remote Worker State Tax Liabilities Before the Tax-Season
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Owing to the novel coronavirus, working remotely has gone from being a perk to standard operating practice for many people. Many employees have started working from states other than the ones where their offices are primarily located. While six out of ten employees reported the benefits of working remotely and enjoyed a better work-life balance, they also increasingly missed out on the tax implications of remote working.
If an employee is working remotely, there are additional tax burdens for both the employee and employer, depending on the employee’s remote location. Further, it gets more complicated if the employee resides in one state but moves to another state – like staying with a relative, opting for a homestay, moving to a second home, etc. – to work remotely during the COVID-19 pandemic.
Therefore, it is advisable to be aware of specific remote worker state tax liabilities before the tax-season to avoid any last-minute complications.
Multiple U.S. states specify that an employee working remotely from these specific states should grant the employer nexus or tax presence with the state for taxation. So, irrespective of whether the employer has a physical facility or property in the state, the state tax laws will be applicable. In this regard, the concerned business entity will be:
- Liable to pay the state-franchise, state-income, and other corporate tax.
- Accumulate and remit sales or utilize tax on taxable sales made into the state.
- Remit payroll taxes to the state.
- Fulfill all other tax laws and additional reporting rules of the state.
Each state in the U.S. has a different approach to nexus due to the COVID-19 pandemic. The state of Kentucky specified that it would view the potential nexus impact of work-from-home arrangements on a case-to-case basis. However, some other states have established that the nexus for the purpose of tax will not be solely crafted based on the employees working remotely during the pandemic. But a few states have also specified nexus tax relief in terms of corporate and franchise tax only. Besides, many other states have not issued any guidance on the nexus during the pandemic. Hence, the tax laws for remote workers might remain the same as they were before the pandemic.
It is advisable for both employers and employees to be mindful of their state’s remote worker taxes, as a shift in employee work location can create possible nexus for the company and also have tax implications for the employees, especially for those who officially reside in a state and work in another.
To determine the percentage of a company’s income that is subject to corporate income tax, several states use an apportionment formula. As per this formula, the state will consider the payroll, property, and sales of the company. Some states focus only on sales, which is also known as single-factor apportionment. However, in the case of the three-factor apportionment formula, the employees working remotely in a state can increase the share of apportionment in the form of payroll in a state. That said, even in a single factor apportionment, remote workers can play a huge role in taxes.
For example, a company has extensive sales in a particular state but no nexus because it does not have an appointed sales team in the said state. The company does not service its goods in that state and also sends the good into the state via a common carrier, which implies it does have distribution teams in the state. In such a case, the company does not owe any corporate income tax to the state concerned. However, in case a remote worker starts operating from the same state; then the concerned state can levy corporate income tax on the sales of the company.
Employer withholding obligations
Typically, an employee pays taxes where they work or earn income. Employers are required to withhold a specific percentage of the employee’s paycheck as personal income tax on behalf of the states in which they work, even if the employee resides in a different state. Alternatively, employees get a credit for paying income tax in their work-residing jurisdiction against their liability in the state they originally live in. Moreover, some states have agreements that allow employees to file taxes with only one jurisdiction instead of multiple states. Besides, some states have not enforced the withholding obligations, if the sole reason for the employees working remotely is the pandemic. So, in such cases, employers continue to withhold the taxes from employee’s paycheck, similar to how they were doing it when the employees were working at the employer’s designated office location.
That said, because of the COVID-19 complications, several of these employees work and live in the same state, which may or may not be the state in which the company has an office. Hence, in such cases, companies begin to withhold taxes according to the laws of the state, in which the employee works, even if it is temporary. This can have different implications for the employees, and as for businesses, it could become a costly affair.
But as with nexus, several states have not disclosed their say on the withholding obligations for remote workers and businesses operating in such capacity. Hence, it is advisable for both employers and employees to look out for withholding rules. It is possible that a state where the employer’s facility is located would be required to oblige the withholding law even for employees not working in the office. Alternatively, the state where the employee resides can also impose a new withholding law on the employer owing to the remote worker’s presence.
Tax liability in multiple states
From the viewpoint of employees specifically, remote work can have unique tax liabilities. Employees, who work remotely from a state that is not the one they originally reside in, might have to pay additional income taxes. So, for someone who lives in state X, but owing to the pandemic has shifted to state Y for any reason like convenience, comfort, etc., can trigger tax charges in state Y in addition to those of state X. However, the state taxes filed in state Y will come with a credit to avoid double taxation.
Further, currently, many employees working remotely need to file an income tax return in every state where they travel for work, even if the duration is limited to a day. Presently, many tax filers do not comply with this regulation, but for extended periods and high-income earners, this becomes mandatory in order to avoid tax penalties. Besides state-related income tax regulations like municipal taxes also play a pivotal role for remote workers. For example, in the state of Ohio, some municipalities do not offer a credit for any municipal taxes paid in the place of employment.
To sum it up
The tax implications for remote workers and employers vary by each state and more so in some municipalities. It is advisable for both parties – employers and employees – to check their tax liabilities for the state they work in and the one they are residing in, irrespective of whether both the states are different or the same.
To be sure of the remote worker state tax liabilities before the tax season, it may be beneficial to talk to your company’s tax division and get a clear understanding to ensure all tax compliances are in order.