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Given the dramatic limitations on business travel and mandatory work-from home policies caused by COVID-19 concerns, multistate employers should evaluate how these disruptions impact their state and local tax obligations related to employment. Following is a brief summary of the state and local employment tax issues that multistate employers may need to address during the COVID-19 pandemic.
Crossing the line
Many employees have severely and unexpectedly restricted their business travel due to COVID-19. Those employees may not cross a state’s or locality’s withholding threshold during the applicable period and, therefore, their employers may not be obligated to withhold tax in the jurisdiction(s). As a result, employers may need to adjust their employees’ nonresident withholding certifications or allocations to avoid over- or under-withholding state or local taxes from wages.
Location, location, location
Moreover, mandatory work-from-home policies may affect state or local withholding reporting and remittance obligations. In the case where an employee normally works in one state but currently teleworks in another state, the employer may need to adjust withholding because states generally require employers to withhold tax based on where an employee works, i.e., the “source” of their taxable wages. Numerous exceptions exist to the general source taxation rule, most notably state reciprocity agreements and so-called convenience of the employer rules. Both of these exceptions may be traps for the unwary, potentially creating additional tax compliance issues for employers. To mitigate this risk, employers may need to update their withholding compliance, polices, and procedures in the jurisdictions where their employees are now teleworking and those of their usual work locations.
In light of current work-from-home policies, multistate employers also should review their compliance with the state unemployment insurance (UI) localization rules and reciprocal agreements, which determine where an employer pays UI tax for an employee working in multiple states. While the UI localization rules are generally uniform across states and reciprocity frequently applies, the UI rules may materially differ from employer withholding source taxation. Thus, work-from-home policies may affect an employer’s UI tax compliance (especially if such policies are extended) and, even worse, may increase an employer’s UI tax liability. Given the dramatic limitations on business travel and mandatory work-from home policies caused by COVID-19 concerns, multistate employers should evaluate how these disruptions impact their state and local tax obligations related to employment. Following is a brief summary of the state and local employment tax issues that multistate employers may need to address during the COVID-19 pandemic.
Other state employment tax obligations, like paid family leave or disability contributions, may be based on the UI localization rules and should also be reviewed given the recent changes to employee work locations. Similarly, changes to employee work location may also effect state corporation income tax compliance and liability, as the payroll factor used in many states’ apportionment formulas frequently (but not always) track the localization rules used for state UI tax purposes. To avoid potential underpayments or overpayments of tax from payroll actor changes, payroll and human resources departments should coordinate with tax departments on any adjustments to state UI wage reporting.
Keeping up-to-date on state guidance
Finally, work-from-home policies also may impact general state and local tax obligations, like corporate income and sales taxes, most notably by creating nexus with the teleworker’s residence state. However, several states already have issued guidance stating they will not assert nexus over an out-of-state business solely because of teleworking due to COVID-19. It is imperative that employers track these developments to minimize their nexus footprint to avoid new state and local tax obligations during this unprecedented period.
Why this is important:
The elimination of business travel and surge in teleworking creates several state and local tax concerns, from withholding and unemployment insurance taxes to corporate income and sales/use taxes. Now is the appropriate time for US employers to proactively evaluate their employment and other state and local obligations to mitigate compliance and audit issues down the road.