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Working remotely in a different state? There may be a tax for that

The COVID-19 pandemic quickly disrupted all organizations, including college campuses, sending students home and forcing nearly everyone else to work remotely. Some higher education institutions pivoted easily and others struggled to ensure their students, faculty and employees had the necessary technology to work and learn remotely. In fact, a number of faculty and employees took advantage of the opportunity to work from somewhere different than their actual homes – moving out of smaller apartments to relatives’ larger homes or finding accommodations in warmer climates. For the most part, colleges, universities and other employers were seemingly unaffected by such changes if work was not interrupted. Unfortunately, those innocuous moves could actually be meaningful when it comes to the state tax liabilities of the employee… and the employer.

Depending on a variety of factors, employers may have been remitting payroll and unemployment taxes to the wrong state, which may not affect them right away. However, such non-compliance could catch up to them; be prepared! If they haven’t already, employers should be reviewing current and historic reporting and compliance in conjunction with where employees worked and are working remotely. 

At the outset of the pandemic, numerous states worked to counterbalance emergency stay-at-home orders with assurances for certain tax-related exceptions for remote employees because of the pandemic and emergency orders. Not every state provided exceptions, however.

Now, with emergency orders being lifted and office buildings and college campuses reopening, many employees have come to the realization they prefer to work remotely, and their employers may be supportive of continued remote and/or hybrid work for a number of reasons depending on the employee’s role. For a growing organization, additional office square footage isn’t needed and hiring the best employee is now borderless.

As the dust begins to settle from the pandemic and employers assess where their employees will be working, candid conversations are crucial to ensure neither the employer nor the employee have state tax compliance issues down the line.

What organizations are starting to see is, even though some states made exceptions to normal nexus, withholding and reporting requirements during the period that emergency orders were in effect, those grace periods have ended. Furthermore, organizations that transitioned to a more permanent remote work environment or hired new employees as full-time remote workers most likely no longer qualify for the state exceptions for those employees as the remote work arrangement was no longer temporary and/or a direct result of emergency stay-at-home orders. It will be up to organization leaders to determine where withholding taxes should be remitted, when the organization became subject to withholding taxes and any change to reporting for unemployment taxes.

Well before the pandemic, a number of states had reciprocity agreements with neighboring states regarding payroll withholding taxes, in which they allowed a resident of one state to request exemption from withholding in the state in which the employee worked. To utilize these exceptions, the employer must maintain documentation from the employee regarding their resident state. If that employee, however, is no longer working in their state of residency or a neighboring state included in the reciprocal agreement, the agreement will not provide withholding and compliance relief for the employer or the employee. 

In addition to payroll tax-related compliance matters, having an employee physically located in another state often establishes nexus and a compliance requirement for other tax types such as business income, sales and use tax, excise taxes, etc. While some states made exceptions for remote employees during emergency stay-at-home orders, as previously noted, those exceptions and grace periods are ending. 

In summary, COVID-19 has caused great disruption in all aspects of our daily lives, leading employers to reexamine how business and education is conducted, including where an employee can work.

Remote workers and the state and local tax ramifications of remote work are some of the most critical issues facing employers and employees as organizations adjust to a new working environment. Baker Tilly can assist your organization with sorting through the various state and local payroll, business and sales tax issues resulting from the pandemic so that your operations remain compliant and to minimize the tax risks associated with remote work arrangements.

For more information, or to learn more about how Baker Tilly’s tax specialists, can help, contact our team.

Donna Scaffidi
Partner, CPA
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