Another Cost of COVID-19 Remote Work – States Want their Cut of Payroll Taxes

Orrick - Employment Law and Litigation

Many employers now have employees who have shifted from working in the employer’s office to working remotely from home as a result of the COVID-19 pandemic. The situation where an employer’s office is located in one state and the employee now works from home in a different state raises several state tax implications, including creating tax nexus between an employer and a state (which would subject the employer to the state’s income and sales tax regimes) and requiring an employer to withhold state income taxes from compensation paid to such employee.

Unfortunately, the states have not adopted a uniform response to deal with employees working remotely due to the COVID-19 pandemic.  Most states have not provided any guidance, so, presumably, pre-COVID-19 rules regarding tax nexus, residency, and withholding continue to apply.  Many states that have provided guidance generally have adopted the position that a change in working location due to the COVID-19 pandemic will be ignored, although some of these states have not addressed the issue for both tax nexus and employment tax withholding.

A Company’s State Tax Nexus

Most states consider a company to have nexus in the state for purposes of all state taxes imposed (e.g., income, sales, and employment) if the company has employees working in the state. Prior to the COVID-19 pandemic, many states asserted nexus over employers due to the presence of a single home-office employee in the state.  As a result of the pandemic, employees of many companies have shifted from working at an office in one state to working at home in another state.  For those employees who live in one state but work in another, many employers, for the first time, have employees performing significant work in a new state.  Although states could assert nexus over companies who now have an in-state physical presence there due to employees working from home due to the COVID-19 pandemic, many states have explained that they will not assert nexus over a company solely due to such a connection with the state.

Some of the states that have provided guidance include:


California will not treat a corporation that had no previous connections with California as doing business in California if the corporation has an employee who is currently working remotely in California due to the Governor’s executive order in response to the COVID-19 pandemic.

District of Columbia

In response to the COVID-19 pandemic, the District of Columbia will not seek to impose nexus on businesses solely on the basis of employees working from home during the District of Columbia mayor’s declaration of emergency, including any further extensions of the declaration, and for 90 days after the mayor declares an end to the public emergency.


Until the earlier of December 31, 2020, or 90 days after the state of emergency in Massachusetts is lifted, the presence of one or more employees working remotely from Massachusetts solely due to a pandemic-related circumstance, including the presence of business property reasonably needed for such persons’ use while working remotely, will not considered to be sufficient in and of itself to establish corporate excise tax nexus.  This same rule will apply in determining whether a partnership has a usual place of business in Massachusetts.  Additionally, the presence of one or more employees working remotely from Massachusetts during this period, due solely to a pandemic-related circumstance, will not in and of itself trigger nexus for sales and use tax collection purposes.

New Jersey

New Jersey announced that in light of COVID-19 pandemic, it will temporarily waive state statute provisions that require the presence of an employee who is employed by a corporation outside of the state but works from their New Jersey home to be treated as sufficient nexus for that corporation, as long as the employee currently is working from home due to the company’s closure or social distancing policy.  Additionally, New Jersey will temporarily waive the state’s sales tax nexus standard, which generally is met if an out-of-state seller has an employee working in the state, as long as the out-of-state seller does not maintain any physical presence other than employees working from home in New Jersey and is below certain economic thresholds.


As a result of the COVID-19 pandemic causing people to temporarily work from home in Pennsylvania, the state will not seek to impose corporate or sales tax nexus solely on the basis of this temporary activity until the date that is 90 days after the Proclamation of Disaster Emergency in Pennsylvania is lifted.

South Carolina

Until June 30, 2021, South Carolina will not use changes solely in an employee’s temporary work location due to the remote work requirements arising from, or during, the COVID-19 pandemic as a basis for establishing tax nexus with the state or altering apportionment of income.

Employment Taxes and Withholding Responsibility

Generally, an employee’s wages for the performance of personal services are sourced to the state where the work is performed for purposes of state individual income tax and related payroll withholding purposes.  In the case of remote employees, this generally means that payroll withholding is due to the state from which they work remotely, regardless of the location of the employer.  However, certain states and cities impose the “convenience of the employer” test (i.e., Connecticut, Delaware, Nebraska, New York State, Pennsylvania and Philadelphia) under which the wages of remote workers are still sourced to the employer’s location unless the employee can demonstrate that the remote working arrangement was done for the employer’s necessity, rather than the employee’s convenience.

Although many employees are now working remotely due to the COVID-19 pandemic, which seems to be due to their employer’s requirement and not due to the employees’ own convenience, no states with the “convenience of the employer” test have provided guidance regarding this issue with respect to the pandemic.

Some of the states that have provided guidance include:


The wages of employees who typically perform services in another state for an employer located outside of California will not be subject to Unemployment Insurance (“UI”) tax, Employment Training Tax (“ETT”), and Disability Insurance (“DI”) withholdings if those employees are temporarily performing services within California due to the COVID-19 pandemic.  If a worker remains in California performing services after state or federal public health officials have ended stay-at-home orders and the worker could have resumed working at their normal work location outside California, the worker and the employer will be considered subject to California employment tax laws.


Out-of-state employers must withhold employees’ Illinois income tax after the employee has worked at home in Illinois for at least 30 days.


A resident employee who, immediately prior to the Massachusetts COVID-19 state of emergency was an employee engaged in performing services from a location outside of Massachusetts, and who began performing such services in Massachusetts due to a state’s COVID-19 state of emergency or other pandemic-related circumstance, will be eligible for a credit for taxes paid to that other state.  In addition, the employer of such an employee is not obligated to withhold Massachusetts income tax for the employee to the extent that the employer is required to withhold income tax with respect to the employee in such other state.

New Jersey

New Jersey sourcing rules dictate that income is sourced based on where the service or employment is performed based on a day’s method of allocation.  However, during the temporary period of the COVID‑19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction.

New York

Under current law, employee taxation and withholding depends on where the “primary office” of the employee is located. The “convenience-of-the-employer” rule provides that an employer operating in New York must withhold New York State income tax from wages paid to an employee whose primary work location is in New York State if (1) the employee spent at least one day during the year in New York; and (2) the employee is working from home outside New York for the employee’s own convenience.  New York recently released guidance which does not view the COVID-19 pandemic as creating a situation that should alter current law.  Thus, an employee whose principal office is in New York State but who is working outside of the state during the pandemic generally will remain subject to New York State income tax, and the employer should generally continue to withhold New York State tax from the employee’s compensation.


If an employee is working from home temporarily due to the COVID-19 pandemic, the state does not consider that as a change to the sourcing of the employee’s compensation.  For non-residents who were working in Pennsylvania before the pandemic, their compensation would remain Pennsylvania sourced income for all tax purposes, including employer withholding and three-factor business income apportionment purposes for S Corporations, partnerships and individuals.  Conversely, for Pennsylvania residents who were working out-of-state before the pandemic, their compensation would remain sourced to the other state and they would still be able to claim a resident credit for tax paid to the other state on the compensation.

South Carolina

Until June 30, 2021, an out-of-state business is not subject to South Carolina’s withholding requirement solely due to the shift of employees working on the employer’s premises outside of South Carolina to remote working from South Carolina.  Accordingly, the wages of a South Carolina resident employee temporarily working remotely from South Carolina instead of their normal out-of-state business location are not subject to South Carolina withholding if the employer is withholding income taxes on behalf of the other state.


Employers should assess the tax laws and any special pandemic rules for the jurisdictions where their employees are remotely working to determine their potential nexus risk.  The analysis should include the criteria for an employee becoming a taxable resident of the state they worked in remotely and whether the state from which the employee worked has an agreement with the state where the employer’s office is located that prevents double taxation (e.g., such an agreement exists between the District of Columbia, Maryland, and Virginia).  Employers that have offices in multiple states may also consider assigning an employee that is working remotely in a state not providing COVID-19 relief to an existing office in the state.  This would reduce the potential of the employer’s state and the employee’s state both imposing withholding requirements (particularly where a state that imposes the “convenience-of-the-employer” rule is involved).  The COVID-19 pandemic rules are continually evolving so the need to assess the tax nexus risk of remote employees should be an ongoing exercise.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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