In theory, telecommuting can dramatically boost productivity, improve employee satisfaction and retention rates, and reduce overhead costs for an organisation. Then again, it can also create tax issues for individuals and organisations.

Regardless of whether the employee elects to work remotely for the duration of the coronavirus pandemic for financial or other logistical reasons, working from home may trigger state tax obligations or modify existing tax obligations. This article provides an overview of state tax considerations that may apply to a remote worker. For more detailed information, please see our recent Alerts. The first major state tax matter is 1. State Income Tax.

State Income Tax

State income taxes bring various implications such as reporting requirements, deductions and varying tax rates seen by remote workers, which can affect worker productivity and company operational costs. The growth of remote work has also given employers new nexus obligations for workers living and working on projects in other states. Employers seeing more and more employees with permanent homes in one jurisdiction but with nexus for sales, property, and local business taxes in various states. Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Washington also do not levy income tax, but if these employees work in two states that do not have reciprocity, they could be doubly taxed with money withheld. Exemption may be granted if an employee performs work out of the state for an employer’s convenience – these are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington.

State Sales Tax

State sales taxes are a major funding mechanism for cities, counties and states, increasing remote work’s compliance obligations and liabilities, which extend across the state sales law and tax domain. For example, an out-of-state worker who lives in Maryland but works from home in Washington DC could create an unwelcome nexus for her employer – paying sales tax in two states, with all the additional work and unintended tax penalties for the company that can create. Those additional payroll factors from Pennsylvania and Virginia would have a rough effect on entities with an apportionment formula (S corporations and partnerships, which pay corporate income tax) by reverting their corporate apportionment percentage (and so their tax liability) to the extent that they hire remote workers in Pennsylvania or Virginia. Those companies’ ability to take federal sales tax deductions for hiring out-of-state workers would also potentially change.

Federal Income Tax

Typically, employees who live and earn wages and benefits in a state pay state income tax on those state-sourced wages and benefits (including those derived from telecommuting). Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee and Washington do not levy a state income tax and employers and employees do not have to withhold state income tax. How about employees of businesses that temporarily worked from home due to the COVID-19 pandemic, trying to determine which states tax them? You will want to answer that question not only according to whether they view themselves as a taxpaying nonresident under financial necessity or convenience, but also according to the travel restrictions of all states to which they have a personal connection. If you or your company is currently not in this complex position with multiple states for tax payments, you will start filing nonresident returns for sales and use taxes, and begin collections/remittances, which is usually avoidable with effective policies and procedures in place.

Federal Unemployment Tax

It also means employers must withhold payroll taxes from worker wages and pay the federal unemployment tax (FUTA), which is levied to sustain Social Security and Medicare programmes. Usually, workers fall under the jurisdictions where they reside and work. But with so many remote employees relocating to avoid driving into hot zones during the pandemic, FUTA rules might have changed for some. Double taxation could result for travelling workers who are required to file nonresident state tax returns (some states have a reciprocity agreement in place that would prevent that; others look to the 183-day residency rule, among other ways to figure out a taxpayer’s residence, and tax). And, work location could subject their employer to jurisdictions that require them to collect, report, and remit state sales tax and revenue-related laws that require their employer collect remit, register – pandemic-era nexus mitigation would disappear, possibly returning.

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