COVID-19 has shifted many work environments into hybrid and remote work, causing potential state withholding tax consequences. Since an employee’s home may not always be in the same state as the company that employs them, these businesses could be subject to multi-state tax obligations.
State income tax normally is withheld and remitted to the state in which services are performed (the “work state”). Employees that live in the same state as their work state do not need to worry about multi-state taxation. Alternatively, if an employee lives in one state and works in another, employees must determine their “state of residence” because it is that state’s income tax laws that apply. Some states require an employer who pages wages to residents of their state to withhold state income tax from wages, even if work was performed in another state. While this could present a double taxation issue for the employee, many states provide a credit for taxes paid to other states or offer a reciprocity agreement with neighboring states.
Additionally, in certain situations, an employer may be required to withhold and remit income tax to an employee’s state of residence if the employer has a business presence or operations in that state – also referred to as “nexus”. An employee working in a particular state or doing as much as making a sale in that state is typically enough to create nexus. Historically, an employee living in another state would not create a nexus, but remote-based work has changed this landscape – more and more employees began to perform their duties at home.
Throughout the COVID-19 crisis, many states elected to waive nexus requirements for businesses with employees teleworking in a different state from the employer’s location since employees were working in other states due the pandemic. Essentially, these states said that if an employee was working in that state temporarily due to the pandemic, employers did not need to withhold and remit income taxes for that employee to that state. These states included Alabama, DC, Georgia, Illinois, Indiana, Iowa, Massachusetts, Minnesota, Mississippi, New Jersey, North Dakota, Pennsylvania, Rhode Island, and South Carolina. Additionally, there is no state income tax in the following nine states: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. These pandemic-related guidelines for temporarily allowing employees to work from other states without being taxed is coming to an end, as it has already expired in many of the states that created COVID-19 nexus policies. Without these pandemic guidelines, employers must review state tax obligations moving forward – they must examine where their employees are working.
Some states have a “convenience of the employer” rule which essentially requires that if an employer request the employee work in another state, then the employee is subject to withholding in that state, but if an employee chooses to work in another location for “convenience” vs. in the business’ work state, then their withholdings are to be based on the business’ work state.
Here at Bryson Law Firm, LLC, we recommend that business owners stay up-to-date with changes to the rules and requirements for states in which they must withholding income taxes for remote-based employees. Businesses may need to withhold and remit taxes to multiple states or change the state of withholding for various employees.
It is also important to note that this issue is not limited to withholding taxes. Through nexus, businesses may also now have business income tax obligations in multiple states, sales and use tax obligations in multiple states, etc.
Keep up to date on the latest tax and IRS news with our weekly blog posts and our social media pages. Call today for your free consultation if you need a tax attorney in Louisiana or Texas. We have offices in Lafayette, New Orleans, Baton Rouge, Shreveport, Houston, and Austin. We are also available to other cities virtually!