Don Warrant, CPA
Director | Tax Practice
Yet another unpleasant side effect of the COVID-19 pandemic and the ongoing battle with its variants is the potential state income/franchise, sales, and payroll tax consequences related to remote workers. Remote workers can create tax compliance issues for both the employer and for themselves. Consider the following:1.) Remote workers can create physical nexus in another state subjecting the employer to another state’s income/franchise, sales and/or payroll tax filing requirements.
2.) Remote workers may subject themselves to another state’s income tax. The employer may be required to register and withhold state income tax on behalf of their remote workers. The remote worker may be entitled to claim a resident credit to avoid double tax.
3.) Six states: Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania, employ a “convenience of the employer rule”. Massachusetts temporarily employed this rule during the pandemic. Under this rule, employees are taxed by the employer’s home state where they normally work if the employee is working remotely for their own convenience. Grace period’s that certain states employed during the pandemic are expiring which may result in double tax paid by the remote worker.
4.) Some states include payroll as a factor when apportioning income to their state. Remote workers increase the payroll factor which increases state income/franchise tax liability.
5.) Due to the lack of uniformity among states, employers must address the specific rules that apply in those states to determine whether to register for income/franchise, sales, and/or payroll taxes, and whether to withhold and remit payroll taxes to those states. This will increase the cost of state tax compliance.
New Approach to Remote Work State Tax Compliance
Due to the pandemic, it is necessary for employers to address whether additional state tax compliance is required when employees are working remotely during the year in other states. Employers should develop a process to track the work location of their employees during the year to determine if/when the employer is required to comply with the tax laws in another state. The employer may be required to register as “doing business” for income/franchise, sales and payroll taxes based on the physical presence of remote workers in another state.
The Tax Team at Freed Maxick can assist in determining the state tax consequences of your remote workforce. For a complimentary discussion of your situation, please contact me at firstname.lastname@example.org, or reach me by phone at 716.847.2651.