As shelter-in-place orders remain for employees across the United States, many businesses continue to grapple with working remotely. With uncertainty on the duration of remote work for most people, employers have concerns.

How are employers impacted when they have jumped from a full office to an entirely virtual workplace? The answer isn’t so cut and dry. From a tax perspective, remote employees may impact employers’ state income tax withholding, income and business activity tax (BAT) nexus, and sales and use tax nexus.

Employee Wages – State Income Tax Withholding

Since state income tax withholding is necessary for the state an employee provides services and not the state where the employee resides, remote work may cause a few complications. For example, an exception to this rule is a reciprocal agreement between an employee’s home state and work state. This agreement allows residents in neighboring states to not have to file and pay income taxes on wages earned in the working state. With the COVID-19 pandemic’s increased need for employees to work remotely, employers may need to register with their employees’ respective states and withhold payroll taxes on wages.

There isn’t a set timeframe in which employers are recommended to take action, unfortunately. Most states have not issued withholding requirements for how long an employee must have worked away from their state. However, given the long list of unprecedented events that have arisen from the pandemic, states have offered COVID-19 guidance for this situation. As long as the employee’s remote work location is due to COVID-19 and is temporary, states will not impose withholding requirements. If an employee does not return to work and continues working remotely, then they may be subject to state tax withholding in their respective city and/or state.

Income Tax and BAT Nexus

Income tax and BAT nexus are established by physical presence and/or economic nexus. Many states have an economic nexus rule or set thresholds, but whether or not a state has a nexus standard, an employee’s physical presence may establish income tax/BAT nexus. However, what happens when employees work within a state they have not before? Does an employee’s inability to travel to their usual office introduce income tax/BAT nexus in their new place of work?

Before the pandemic, many states held a firm stance of businesses having one employee working in another state (even for a day) to be subject to a state’s business tax. Certain states elaborated on “physical presence”, saying an employee had to be present in the city/state for more than seven days to create a physical presence nexus. Other states argued 10 days was more effective. As COVID-19’s shelter-in-place orders see some employees approaching 10-plus weeks away from their offices, companies are left to decide which jurisdictions they have income tax/BAT nexus in and if they’ll need to file any more 2020 state/city tax returns because of remote employees. Generally, if an employee’s work location is indeed temporary, income tax/BAT nexus may not be created.

Business Taxpayer Implications

Much like state withholding taxes, some states have discovered potential implications of teleworking employees on business taxpayers. These states have provided COVID-19 nexus relief and noted that the state’s tax departments would not use an employee’s temporary location to determine BAT nexus in that state. Georgia stated an employee’s temporary working location would not void an employer’s Public Law 86-272 protection as long as the temporary location remains an “official work from home order issued by an applicable federal, state, or local government unit.”

Georgia is also a trailblazer in the sense it has addressed PL 86-272 implications, as most states have remained silent despite offering overarching COVID-19 nexus guidance. Any business who previously claimed protection from PL 86-272 should reevaluate their protection, as non-sales employees within a state can be considered an unprotected activity. As a result, this may cause business taxpayers to not only have more state income tax liabilities but also affect the number of sales subject to throwback to the state of origin.

Sales and Use Tax Nexus

Much like BAT taxes, the nexus of sales and use tax may be created by even a single employee visiting a state, let alone staying there for multiple weeks. If employees temporarily live in a state where their business is not collecting and remitting sales and use tax, the business may now be subjected to new sales and use tax registration, filing and collection requirements. States who recognize the implications COVID-19 brought to BAT tax nexus are now realizing the need to address sales and use tax nexus. Few states have stated they will “waive” sales tax nexus if no other factor created the nexus. This means if the jurisdiction’s nexus thresholds are met or if the taxpayer had property in another state (in addition to the remote space) then the state would not waive sales tax nexus.

Next Steps

As the COVID-19 pandemic continues to play out, we can hope there will be federal and/or state guidance given to clarify payroll withholding, BAT nexus, and sales and use nexus. Until then, businesses must rely on the approach of each jurisdiction to provide relief to taxpayers whose workforce has been disbursed due to the current crisis. For the time being, some helpful tips for employers and employees include:

Employers

  • Know where your employees are working from
  • Monitor their times spent working in that location
  • Stay up-to-date on guidance issued by states where they have employees

Employees

  • Track the time spent working at your temporary telework location
  • Monitor your tax withholdings on each paystub
  • Communicate to your employer if you are planning to stay teleworking after it is time to return to the office

If you have questions related to your business’s tax implication of employees working remotely, contact the tax advisors at Doeren Mayhew today.