With the majority of the nation facing limitations on business travel and mandatory stay-at-home orders, states and localities are beginning to issue guidance on the impact that COVID-19 disruptions will have on withholding obligations for multistate employers. Some states have responded to COVID-19 telework requirements in a variety of ways:
- New Jersey and Mississippi have altered their withholding policies to allow businesses to retain their same withholding for employees’ temporary pandemic-related telework location. In general, businesses likely will not incur new withholding obligations in these states as a result of in-state teleworkers who regularly work out-of-state.
- Minnesota and Maryland issued guidance indicating that teleworkers may create new withholding obligations. Businesses in these states may need to change their withholding to reflect employees’ states of residence as their place of work. However, Maryland’s reciprocity agreements with most neighboring states could mean few changes for Maryland employers.
- Ohio passed legislation providing that pandemic-related remote work does not count toward the 20-day withholding threshold for municipal income taxes.
- For corporate income tax purposes (as opposed to withholding), the District of Columbia, Indiana and North Dakota indicated that they will not impose corporate income tax nexus due to the temporary presence of new teleworkers without specifying what impact this will have on withholding obligations.
This legal alert reviews some of the recent COVID-19 withholding guidance issued by states and localities so far, including its potential impact on employers and employees.
Why Employers Need Guidance from the States
Employers are generally required to withhold tax from the wages based on where an employee works or, in some cases, where an employee resides. However, many employees are no longer able to report to their offices or other regular work location because of mandatory stay-at-home orders and, accordingly, those employees are teleworking. State tax complications arise when an employee’s regular work location is in a different state than their current teleworking location, which presumptively (but not always) is the employee’s state of tax residence. Several states have recognized the compliance issues that this may have for employers and have issued guidance, as described in this legal alert.2
Maintain the Status Quo? New Jersey, Mississippi and Pennsylvania
New Jersey was among the first states to proactively provide employers with COVID-19 withholding guidance in March. The online guidance from the New Jersey Treasury’s Division of Taxation says that “during the COVID-19 pandemic, wage income will continue to be sourced as determined by the employer in accordance with the employer’s jurisdiction.”3 The Division’s pronouncement has particular significance for employers with New York-based employees who are teleworking from New Jersey due to the COVID-19 pandemic, in light of New York’s “convenience of the employer” test.4 The Division’s website also notes that Reciprocal Personal Income Tax Agreement between New Jersey and Pennsylvania eliminates wage issues for some employees because the states have an agreement not to tax residents of the other state. Recognizing the complex withholding rules of its neighboring states, the Division’s pronouncement indicates that tax, penalty and/or interest relief may be available, “on a case by case basis if circumstances warrant.” 5
The Mississippi Department of Revenue similarly indicated in a March 26 press release that it would not change withholding requirements for employers based on COVID-19 related telework arrangements.6 The state will also not use any temporary changes in employee work locations to impose nexus or alter income apportionment on businesses.7 Mississippi residents are already subject to personal income tax on their total income, regardless of where they work.8 However, the Department will not impose a new withholding obligation on employers for wages paid to Mississippi teleworkers. Therefore, employers will not see any Mississippi withholding changes due to employees temporarily working within the state during the pandemic.
Pennsylvania’s Department of Revenue released informal online guidance through its customer support portal regarding the tax ramifications of Governor Tom Wolf’s March 6 Proclamation of Disaster. During the disaster period, the Department will not consider temporary telework as a change to the sourcing of compensation for employees who normally work within the state, even if those employees telework from outside of the state.9 Thus, the Department asserts that employee compensation retains its Pennsylvania-source, and withholding is required.10 The Department did not explicitly state that it will provide the same treatment to employees temporarily teleworking inside Pennsylvania for out-of-state employers. It is likely that current Pennsylvania withholding rules apply because the Department publicly stated that it will not seek to impose sales tax or corporate net income tax nexus on the basis of in-state teleworkers, but did not extend that forbearance to employer withholding.11
Finally, in a departure from the administrative guidance of other states, Ohio included telework withholding guidance in its COVID-19 relief legislation. Employers are typically required to withhold applicable municipal income taxes if an employee works in a municipality more than 20 working days in a calendar year.12 However, H.B. 197, signed by Governor Mike DeWine on March 27, provides that any day worked during the course of the state’s pandemic emergency declaration, through 30 days after the declaration is lifted, will be attributed to the employee’s principal place of work.13 Hence, H.B. 197 provides a safe harbor for employers by not counting teleworking days towards the 20-day threshold for municipalities other than their teleworkers’ principal place of work, which generally means “the fixed location to which an employee is required to report for employment duties on a regular and ordinary basis.” 14
Current Rules Apply: Maryland, Minnesota and Localities
Although a few jurisdictions indicated that they will suspend the imposition of new withholding requirements during the COVID-19 pandemic, other jurisdictions have stated that they will continue to apply existing rules, with varying results:
- Maryland and Minnesota recently put taxpayers on notice that telework may create new withholding obligations through the application of existing rules.
- The City of Philadelphia clarified that its existing withholding standard does not impose wage tax on teleworkers who are outside of the city.
- Charleston, West Virginia, reminded employers that the application of the city’s user fee will not change based on temporary pandemic-related work arrangements.
In a March 14 Tax Alert, Maryland’s Comptroller states that “Maryland employer withholding requirements are not affected by the current shift from working on the employer’s premises to teleworking because taxability is determined by the employee’s physical presence.”15 The alert further provides that “[c]ompensation paid to a Maryland nonresident who is teleworking in Maryland is Maryland-sourced income, and therefore, subject to withholding.”16 Maryland has tax reciprocity agreements with the District Columbia and all of Maryland’s bordering states except for Delaware.17 Accordingly, the Comptroller’s position may have limited implications for Maryland’s temporary telecommuters.
Minnesota’s Department of Revenue published an online FAQ related to COVID-19 tax questions, stating that “[f]or Minnesota residents, there are no additional payment or withholding requirements. They are already taxed on income earned inside and outside the state.”18 However, nonresidents temporarily telecommuting in Minnesota may experience changes based on the number of days that they physically work in Minnesota.19 But, those nonresidents teleworking in Minnesota (and their employers) may be afforded relief if they are residents of reciprocal states – Michigan and North Dakota.
Sourcing changes are possible for employees of Philadelphia-based employers. In an April 14 guidance release, the Philadelphia Department of Revenue reiterated the city’s current “requirement of employment” standard for determining wage taxes.20 Under this standard, “a nonresident employee is not subject to the wage tax when the employer requires him or her to perform a job outside of Philadelphia, including working from home.”21 Accordingly, Philadelphia-based employers are not subject to the city’s wage tax for employees working outside of the city during the pandemic. 22
Also on April 14, the City Collector of Charleston, West Virginia, issued an opinion that temporary pandemic-related work arrangements will not impact the application of the city’s user fee, which is a flat fee withheld from employee wages and remitted by employers based on the employer’s place of business in Charleston.23 Therefore, the Collector concluded that employees of Charleston-based employers will still be subject to the city’s user fee even if temporarily working outside of the city.24 Conversely, the Collector explained Charleston residents who are temporarily working from home for employers located outside the City should not have the user fee withheld because these employees are not employed by a location within the City.25
Withholding the Withholding Guidance: DC, Indiana and North Dakota
The District of Columbia, Indiana and North Dakota indicated that they will not assert nexus for corporate income tax purposes, but each jurisdiction has not issued explicit employer withholding guidance so far.
The District’s Office of Tax and Revenue issued a Tax Notice on April 10, providing that it “will not seek to impose corporation franchise tax or unincorporated business franchise tax nexus solely on the basis of employees or property used to allow employees to work from home (e.g., computers, computer equipment or similar property) temporarily located in the District during the period of the declared public emergency and public health emergency, including any further extensions by the Mayor.”26 While the tax notice does not otherwise provide that withholding obligations will also remain unchanged, many employers within the District likely will not see changes to withholding obligations given the District’s inability to tax nonresidents and reciprocity agreements with Maryland and Virginia.
Similarly, the Indiana Department of Revenue published an online FAQ stating that it “will not use someone’s relocation, that is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis, as the basis for establishing Indiana nexus or for exceeding the protections provided by P.L. 86-272 for the employer of the temporary relocated employee.”27 More guidance may be needed for employers to have certainty on their state withholding obligations.28 But some Indiana employers may have limited state withholding issues due to stay-at-home orders during the COVID-19 pandemic, given the state’s reciprocity agreements with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin.
The North Dakota Department of Revenue also published an online FAQ indicating that the state will not assert corporate income tax nexus solely due to temporary pandemic-related telecommuting arrangements.29 The FAQ further provides that “[i]f the telecommuting is attributable to a COVID-19 related response and is intended to be temporary, North Dakota will not require inclusion of that payroll in the numerator of the payroll factor.”30 As with Indiana, some employers may not need to change withholding for some employees due to reciprocity agreements with Minnesota and Michigan.31 In any case, North Dakota ultimately may waive withholding requirements along with its corporate income tax changes, but the state has yet to specifically grant that relief.
More States Likely to Follow
The emergence of COVID-19 disrupted many aspects of US work-life, including the daily trips to the office that the majority of workers made. As governments continue to issue and extend stay-at-home orders, more states are likely to address the withholding implications of remote work. While it is unknown whether states will forgo imposing new withholding obligations on employers like Mississippi, or stick to preexisting rules like Maryland, it is certain that the variety of state approaches mean that taxpayers cannot assume that their pre-COVID-19 withholding obligations will remain the same. In any case, employers should keep abreast of the different withholding requirements that their new teleworkers could trigger and the following guidance issued by state tax agencies, then evaluate the potential risks of non-compliance and costs of changing withholding practices for a temporary period.
1 As of April 16, 2020, there are 43 states and the District of Columbia with stay-at-home orders.
2 Employers can also not solely rely on the rules of bordering states, since employees may have chosen to temporarily work from relatives’ homes further away.
3 NJ Dept. Treasury, “COVID-19 Related Tax Extension Information,” 4/16/2020.
4 See generally, New York Techn. Svc. Bureau Memorandum TSB-M-06(5)I (May 15, 2006).
5 NJ Dept. Treasury, “COVID-19 Related Tax Extension Information,” 4/16/2020.
6 Miss. Dept. Rev., “Mississippi Department of Revenue Response to Requests for Relief,” 3/26/2020.
9 Pennsylvania Customer Support Answers - Corporate Nexus, Pa. Dept. of Rev., Answer ID 374, 4/03/2020.
11 Pennsylvania Customer Support Answers - Corporate Nexus, Pa. Dept. of Rev., Answer ID 3740, 4/03/2020.
12 Ohio Rev. Code Ann. § 718.011(B)(1).
13 Ohio H.B. 197 § 29 provides “Notwithstanding section 718.011 of the Revised Code, and for the purposes of Chapter 718 of the Revised Code, during the period of the emergency declared by Executive Order 2020-01D, issued on March 9, 2020, and for thirty days after the conclusion of that period, any day on which an employee performs personal services at a location, including the employee's home, to which the employee is required to report for employment duties because of the declaration shall be deemed to be a day performing personal services at the employee's principal place of work.”
14 For purposes of the 20-day threshold and other municipal withholding obligations, “principal place of work” is defined in Ohio Rev. Code § 718.011(A)(7).
15 Md. Tax Alert 04-14-20B.
17 Maryland has reciprocity agreements with Virginia, Washington DC, West Virginia and Pennsylvania.
18 Mn. Dept. Rev. “COVID-19 FAQs for Individuals,” 4/15/2020.
20 Philadelphia Dept. Rev. “Wage tax policy guidance for non-resident employees.” 4/14/2020.
22 Id. Further, non-resident employees can file a wage tax reconciliation form in 2021 for any amounts withheld during the time when they had to telecommute from outside of the city during the pandemic.
23 Charleston City Collector Opinion, “City Service Fee (“User Fee”) and COVID-19 Work-Related Relocation.” 4/14/2020.
26 OTR Tax Notice 2020-05, “COVID-19 Emergency Income and Franchise Tax Nexus,” 4/10/2020.
27 Ind. Dept. Rev. “Information about DOR and the Coronavirus - COVID-19 FAQs.”
28 While Indiana counties also impose income taxes and employer withholding obligations, the determination of county of residency and county of principal employment are determined as of January 1. See Indiana Dep’t of Revenue Departmental Notice #1, R34 (Dec. 2019).
29 ND Dept. Rev. “Guidance for North Dakota Taxpayers During COVID-19 Precautions,” 4/17/2020.
31 North Dakota Office of the State Tax Comm’r, Form NDW-R Reciprocity Exemption.