The Covid-19 pandemic has had an impact on our workforce. Companies were forced to quickly respond to a work-from-home model for its employees. Many employees began working from states other than the states in which their assigned offices were located. As a result, questions are being raised such as whether the company will have nexus for corporate income tax and sales and use tax purposes in the states where it has remote employees, should the company begin withholding on wages earned by the employee based on the location of the remote employee and whether the employee should be filing a nonresident tax return in the state in which she is working remotely.
Nexus for Companies – Corporate Income Taxes and Sales and Use Taxes
Generally, states will assert that an employee working from home or remote location within the state will trigger nexus for the company. Nexus is used in tax law to describe a situation in which a business has a tax presence in a particular state, therefore, subjects the company to the state tax laws, such as corporate income or franchises taxes, or sales and use taxes tax.
States have varied in approaches to nexus relief in response to the COVID-19 pandemic and have not published much guidance on the this issue. Depending on the state, some states have indicated that nexus for purposes of corporate income tax, and sales and use tax will not be established solely based on employees working remotely due to the pandemic or if the state was under a state at home order. However, certain states have limited such nexus relief only to corporate income tax or franchise tax.
Companies must track its employees and then understand the state tax laws, rules and guidance in those states to determine whether the company will have an income or franchise tax, or sales and use tax filing obligations.
Withholding by Companies
Generally, states that impose a personal income tax require a company to withhold income tax from a employee’s wages for wages earned within the state. In response to remote working arrangements adopted (or necessitated) as a result of the pandemic, many states have chosen not to enforce employer withholding requirements if the only reason the employer would be subject to such requirements is an employee’s working at home or a remote location as a result of the pandemic. For example, certain states have announced that employers should continue withholding as if the employee had continued to work at the employer’s location during the pandemic, even if withholding guidance applicable prior to the pandemic would not have required withholding.
As with nexus, not all states have published guidance to address withholding obligations during the pandemic. In addition, certain states appear to indicate that it will not deviate from their ordinary employer withholding requirements as a result of the pandemic. Companies should monitor such guidance in the states in which they have remote employees. Please note it is possible that the state where an employee is domiciled (resident state) could continue to require withholding with respect to employees, while the state where employees are working remotely (nonresident state) could also impose a new withholding requirement on the employer.
Income Earned by Employee in Remote Location (Nonresident State)
Generally, states require individuals who earn income in a state other than the state in which they are domiciled (the “home state”) to file a nonresident return in such state. For example, if I work and a, a resident of Texas but travel to Louisiana to do work, I would be required to file a nonresident tax return in Louisiana for the income that I earned while in Louisiana and pay Louisiana personal income tax.
If you are working in multiple states during the year, such individuals will likely owe money to the nonresident state because they have not had any tax withholding in that state by their employer. Generally, an individual pays tax to the state of residence on all of his or her income earned and would be allowed a credit for taxes paid to nonresident states.
Employees must be proactive and notify their employer the location in which they are working and earning such income. Employees must be specific as to locations, city and counties, because such local governments may also impose a personal income tax on individuals. Remote employees must consult with a tax professional to make sure they do not have a tax filing and obligation in April 2021 for the 2020 tax year.
In conclusion, companies must monitor state tax law, rules and other guidance published by states in which it has employees working remotely (i.e., away from their traditional offices) to determine whether the employees’ presence at their remote worksites may establish nexus and employer withholding obligations for the company. Furthermore, employees must also monitor the guidance published by states to determine whether they must a file a nonresident personal income tax return in such state the employees are working remotely and earning income.