Where remote work exposes the company to liability, such companies may need to consider creating "blacklist states" states where employees are prohibited from working remotely. Zelinsky is claiming a refund attributable to the percentage of time spent working from home in Connecticut. Act. New Jersey and Connecticut filed a joint amicus brief asking the Court to rule the scheme unconstitutional, citing their loss of revenue to New York. (iStock) Tax officials in New York state are taking a closer look at the . Jurisdictions are shifting from temporary relief and guidance, driven by the pandemic, to enacting new legislative, regulatory, and administrative guidance to adapt to the expansion of more permanent remote-work arrangements.21 Tax professionals will find opportunities to be both proactive and reactive in addressing these evolving state and local tax issues. Go to the State withholding section. New Jersey tax rules require income to be taxed where an employee does the work . Resources. Hiring employees; About New hire reporting; New hire Online reporting; File and pay. See Del. In many cases the employee's presence may amount to a nuisance tax, but compliance is still key to avoiding unwanted penalties and interest for failure to abide by a jurisdiction's tax rules. In addition, some cities and localities, such as New York City and Yonkers, New York, have their own taxes, which means some taxpayers will have to pay taxes to three entities. However, adding to the complexity, a handful of jurisdictions take a different approach by applying a "convenience of the employer" rule that provides that only if an employer requires an employee to work from a different jurisdiction is the employee not subject to tax at the employer's normal work location. In sum, the New Jersey Divisions guidance follows the sourcing rules of the employers jurisdiction during the COVID-19 pandemic. Below is a review of critical state and federal tax . In Telebright, the court analogized the employee's software writing to that of a manufacturing employee who fabricated parts in New Jersey for a product that was then assembled out of state.The court reasoned that the statute should be construed broadly and, without difficulty, concluded that TeleBright was "doing business" in the state by virtue of the telecommuting employee. Arkansas recently enacted legislation reversing the state's "convenience" rule, retroactive to Jan. 1, 2021 (Ark. The employer is required to withhold Connecticut income tax on wages paid to the nonresident employee in the same proportion that the employee's wages derived from or connected with sources within Connecticut relate to the employee's total wages. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. 165(g)(3), Recent changes to the Sec. Proactive opportunities include addressing remote hiring practices to maintain current no-nexus positions, determining the optimal legal entity for hiring remote workers in new states, establishing systems and processes to gather data on actual remote work time and locations, understanding what job functions and responsibilities remote employees have in claimed P.L. By Deirdre Sullivan March 1, 2022. & Fin., Technical Memorandum No. As outlined in the employer considerations noted above each State is setting its own COVID exception rules you must consider the general concepts of state taxation and discuss the impact with your tax advisor. As businesses enter the clichd "new normal," it may appear everything has changed. Family oriented. Some states have been enacting a so-called "convenience of employer" rule that subjects employees to . The intersection of tax withholding, remote work, and local tax rules can be seen in the dispute between Massachusetts and New Hampshire in 2020 over nonresident taxation. EY Americas Financial Services Tax Managing Partner. If passed, this could help future workers disrupted by lockdowns. Form W-9. PA Convenience of the Employer Doctrine: Income Tax Withholding Considerations for Partially Remote Workers. The "bona fide employer office" exception is narrow, meaning that most work-from-home employment still would be treated as New York-sourced income. With the CAA, the credit was increased to 70% of . However, an argument arose as to whether New Hampshire had standing to bring the suit. Be prepared with all documentations and records. Enabled by data and technology, our services and solutions provide trust through assurance and help clients transform, grow and operate. Many people may not realize that you do not need to live in New York or be physically present there to be subject to New York income tax on your wage income. Again, it is important to note that in order to apply this, the employer must have reliable data on the remote work location and wages. The onset of the COVID-19 pandemic in March 2020, coupled with the rise in New York individual income tax rates that became effective in April 2021, spurred many individuals to move out of New York and change their tax domicile to a low- or no-tax state such as Florida. Form W-9. )Resident income tax withholding. Secondary factors are the following: (1) the home office is a condition of employment, (2) the employer has a bona fide purpose for the home office location, (3) the employee performs core duties from the home office, (4) the employee meets or deals with clients regularly at the home office, (5) the employer does not provide the employee with a designated office space at its regular places of business and (6) the employer provides reimbursement of substantially all expenses for the home office. Remote employees are employees who work outside of the office setting and are on a companys payroll, while independent contractors are self-employed and responsible for managing their own taxes. Absent any special waiver, a remote employee can create nexus for various taxes, including income taxes, gross receipts taxes, sales taxes, and local business taxes. The CARES Act credit was effective March 20 to Dec. 31, 2020, and was equal to 50% of qualified wages. 4See N.J. Div. See Ark. remember settings), Performance cookies to measure the website's performance and improve your experience, Marketing/Targeting cookies which are set by third parties with whom we execute marketing campaigns and allow us to provide you with content relevant to you. If the employee lives and works in different states and those states do not have a reciprocal agreement, the employee will have to file two tax returns, one for each state. Since New Hampshire does not have an individual income tax, the assertion was that there was no direct harm to New Hampshire by virtue of Massachusetts' policy. Dont get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. On May 4, 2020, the Office of the Comptroller of Maryland issued updated guidance to address withholding questions it received concerning temporary telework within the state due to COVID-19. This is particularly true for employees who work in New York but live in another state during the pandemic. To be considered "bona fide," an employer office must satisfy either (1) a primary factor or (2) at least four secondary and three other factors. NJ/PA agreement noted above). Some states that are not a part of a reciprocal agreement include Connecticut, Delaware, and New York, which have adopted the convenience of the employer rule explained below. of Equalization,430 U.S. 551 (1977). Employers are required to withhold and pay personal income taxes on wages, salaries, bonuses, commissions, and other similar income paid to employees. However, in an October 2020 update on its website, the New York Department stated that "if you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in [New York] unless your employer has established a bona fide employer office at your telecommuting location.". Because of this, both you and your employees should be on the lookout for changes in tax law. Florida and Texas who decide to work in a state that assesses income tax, e.g. Enter your name and email for the latest updates. The evolution and expansion of remote working provides tax professionals with an opportunity to put these skills to work and drive value for their businesses and clients. ACA reporting compliance is important for employer tax filing. The ongoing shift to remote work calls into question the satisfaction of these existing jobs requirements, the ability to renegotiate these benefits, as well as the approach to pursuing similar credits and incentives in the future. New York also has a convenience rule, under which New York state tax withholding for remote employees must be withheld if an employee works outside New York for their convenience rather than due to employer necessity. Regs. New York: New York Senate bill S.8386 proposed that employees working outside the State (or City) during the pandemic (defined as the time period covered by New York Executive Order 202, March 7, 2020 to September 7, 2020) should be deemed to be doing so as a matter of necessity rather than for the employees' convenience and, thus, those . It often occurs when a company has a physical presence or an economic relationship in a state. Given the prolonged length of the pandemic and the adjustment to remote work for both employers and employees, remote work may very well . In fact, the majority of states take the position that a telecommuting employee creates sufficient nexus to subject an employer to the state's business taxes. With many business leaders forecasting that remote work is here to stay, full remote work or hybrid telecommuting arrangements will likely be commonplace. ,419 U.S. 560 (1975) (the presence of one employee within the state of Washington was sufficient to subject the company to the state's business and occupation tax without violating due process); See Pa. Dep't of Rev., "Telework Guidance," available, Telework Guidance Updated 08/03/2021," available at, For a further discussion of the erosion of nexus protection and the burden on small businesses, see Stanton, ". Remote-work impacts extend far beyond income and employment taxes. Federal Unemployment Tax: On the first $7,000 in wages, the rate is 6%. For state payroll tax purposes, things get complicated when the employer and employee are in different states. Other states have a threshold like IllinoisNew York's is 14 days, for example," Kane says. denied. An exception exists if that specific state has not imposed an income tax or there is a reciprocal agreement between the state where the employee works (where the service is performed) and where the employee lives. 1SeeStandard Pressed Steel Co. v. Department of Revenue,419 U.S. 560 (1975) (the presence of one employee within the state of Washington was sufficient to subject the company to the state's business and occupation tax without violating due process);National Geographic Soc'y v. California Bd. EY helps clients create long-term value for all stakeholders. Here's Big Rule #1: Any state that can claim you as a resident gets to tax your income. See also Bell-Jacobs, McCann, Wlodychak, "Where Individual, Corporate, and Passthrough Entity Taxation Meet," 52The Tax Adviser392 (June 2021). As such, it is imperative to accurately reflect changes in the calculation of apportionment during the tax year, as well as part of the tax compliance process. Ashley Webb |. Code tit. Other factors are (1) the employer maintains a separate telephone line for the home office, (2) the home office address is listed on business letterhead, (3) the employee uses a specific area of the home exclusively for the business, (4) the employee keeps inventory of products or samples at the home office, (5) business records are stored at the home office, (6) the home office has a sign indicating that it is a place of business, (7) advertising for the employer lists the home office, (8) the home office is covered by business insurance, (9) the employee is entitled to home office expense deductions and (10) the employee is not an officer of the company. Experian and the Experian trademarks used herein are trademarks or registered trademarks of Experian. After a year of New York taxpayers having to . 2South Dakota v. Wayfair, Inc., 504 U.S. 298 (2018). The COVID-19 pandemic has forced many businesses to close physical offices and transition their workforce to a remote work format. Services, intangibles, and sales of other than tangible personal property are generally sourced using either market-based sourcing or the cost-of-performance method. For instance, the reciprocal agreement between NJ and PA if you work in NJ and live in PA your wages are only taxed in PA and your employer withholds PA taxes instead of NJ Taxes and vice versa. State & Local Tax Considerations for Remote Employees During the COVID-19 Pandemic, Setting Up Your Box Account & Accessing Your Files, City of Philadelphia Department of Revenue, State Guidance Related to COVID-19- Telecommuting Issues. Codes R. & Regs., tit. Generally, the employers location is deemed the site of the employees services unless the employee is working at employer-designated sites in other jurisdictions. Working from an out-of-state home does not mean you can skip paying New York taxes. State income tax withholding is generally required for the state in which the employees services are performed, and not for the state in which the employee lives. Although not a convenience-of-the-employer state pre-pandemic, Massachusetts took a similar status quo position whereby it treated employees who had worked in Massachusetts pre-pandemic as if they were still working in Massachusetts during the pandemic.16 Thus, employees working from home in New Hampshire were still subject to Massachusetts' income tax. 12-711(b)(2)(C); Conn. Rev. Once again, this highlights the practical need to accurately capture the location from which compensation is earned. Read our state-by-state guide and FAQs from Experian Employer Services for more information. For the last 5 years, I've been living in NY but doing remote work for a company in MD. Association of International Certified Professional Accountants. To avoid double taxation, most states allow their residents to claim a credit for taxes paid to nonresident states on the same income. While employees focus on employment taxes, employers need to consider not only employment taxes but also a broad array of other state and local tax issues, including nexus, apportionment, compliance, and financial statement reporting. Thus, Telebright is an important reminder of the position taxing authorities can take, as this column next delves deeper into the issues raised by a growing remote workforce. Code tit. . 830517 (N.Y. State Div. 5For a further discussion of the erosion of nexus protection and the burden on small businesses, see Stanton, "Erosion of Nexus Protection and the Burden on Small Businesses," 52The Tax Adviser182 (March 2021). Servs., 2020 Form CT-1040,Connecticut Resident Income Tax Return Instructions, p. 27. 15While Philadelphia maintains a "requirement of employment" standard, temporary relief was provided during the pandemic. While the new law applies specifically to Connecticut nonresidents who telecommute to Connecticut from out of state, it may similarly apply to Connecticut residents who telecommute into a state that has a convenience rule, such as New York. Servs., 2020 Form CT-1040. Employers may be required to report taxable employee benefits, such as bonuses and stipends, for remote workers and withhold income taxes for the respective states. Meanwhile, others are still contemplating whether to make this change permanent.