Have You Thought About … How State and Local Income Tax and Employment Laws Apply to Remote Workers During COVID-19? (Part 1)

Brownstein Hyatt Farber Schreck
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Brownstein Hyatt Farber Schreck

COVID-19 has drastically changed how and where employees work. Many employees are now temporarily working from their homes or other remote locations. These temporary (and sometimes longer-term) telecommuting arrangements raise questions about how state and local income tax laws and employment laws should apply to employees who live and work in different jurisdictions.

For example, think of many large metropolitan areas—e.g., Washington, D.C.‑based employers may have employees resident in Maryland or Virginia; New York City‑based employers may have employees resident in New Jersey, Connecticut or Pennsylvania; and Las Vegas‑based employers may have employees resident in California or Arizona. It also may be that although one state may be the situs for the employer’s operations and the employee’s residence, they may be in different local jurisdictions—e.g., employers with operations in Philadelphia or Los Angeles may have employees resident in Pennsylvania or California, respectively, but outside the city or county limits. And an employer faces similar issues if an employee has temporarily relocated to another state that is neither the state in which the employer’s operations are located nor the employee’s resident state—e.g., to shelter with family or because travel restrictions make it difficult to return home. (Note: Part 1 of this article addresses tax issues; Part 2 addresses other employment issues.)

State and local governments have responded with guidance that addresses the effect of temporary telecommuting situations on state and local taxes and employment laws. In addition to analyzing these temporary telecommuting rules, an employer needs to consider the ramifications if the employer decides that telecommuting should be part of some employees’ permanent work conditions.

State Income Tax Withholding

Many state income tax wage withholding rules depend on whether an employee lives in the same state in which he or she works.

  • State Income Tax Withholding by the Employee’s Home State. The general rule is that if an employer’s business operations and an employee’s principal residence are in the same state, state income tax withholding is generally required on all wages earned by the employee within and outside of the employee’s resident state. Many states also take the position that when work is primarily performed from an employee’s home, the employee’s home is a regular place of business. As a result, state resident income tax withholding applies in the employee’s home state in these instances.
  • State Income Tax Withholding by the Employee’s Work State. The general rule is that where an employer does not have business operations in the employee’s home state, state income tax withholding is required only on wages earned by the employee in the employee’s work state. Some states (g., Connecticut, Delaware, Nebraska, New York, Pennsylvania) have a “convenience of the employer” rule that affects state income tax withholding depending upon whether the employee is working in a state other than the employee’s work state for the employee’s own convenience or out of necessity in order to carry out the duties assigned by the employer.

But what is a state’s position with respect to an employee who is temporarily working from home due to the COVID-19 national emergency? Many states and local tax jurisdictions have issued special guidance to address how the state’s tax withholding rules apply when an employee is temporarily telecommuting due to the COVID-19 national emergency and thus has a home state that is different than the employee’s work state. The guidance is as varied as the 50 states. Some states have yet to issue guidance, leaving employers in a quandary. An employer needs to examine the rules of each employee’s home state and work state to determine if it is properly withholding and reporting state income taxes. Failure to do so could subject the employer to monetary penalties. And, an employer needs to monitor the state and local guidance, as changes can be expected as states emerge from the mandatory coronavirus lockdown.

Other Taxes

Similar conundrums exist with respect to employment taxes. And employers need to think about whether the employee’s home state will assert nexus for other business taxes (e.g., sales and use tax, corporate income tax). Also of concern is whether the employer must comply with the workers’ compensation requirements of the employee’s home state.

Reporting of Wages for State Unemployment Insurance

Fortunately, for purposes of wage reporting for state unemployment insurance purposes, a uniform wage reporting standard applies with the result that, for most employees temporarily working from home in connection with COVID-19, employers continue to pay unemployment insurance to the state where the employee normally works rather than to the employee’s home state. (See Attachment 1 to the “Localization of Work Provisions - Principles for Determining Where Wages Should Be Reported When Work is Performed Entirely in One State or in a Number of Different States,” UIP Letter No. 20-04 (May 10, 2004), https://oui.doleta.gov/dmstree/uipl/uipl2k4/uipl_2004.htm.) Of course, this outcome would change if the telework arrangement lasts for an extended period or is made permanent.

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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