US Tax Considerations Where Employees Work From Home
The COVID-19 pandemic is significantly changing the conduct of business in the US. Many employers, whether the result of government mandates or because of concern for the safety of employees, are requiring employees to work from home rather than commute to the office where they typically work. Because the US has multiple levels of both business and individual taxation, state and local tax consequences must be considered.
Generally, state income tax withholding is required in the state in which the employee performs his or her services, not the state in which the employee resides. Some states have reciprocal agreements so that residents in one state do not have to file income tax returns or pay income tax on wages earned in the non-resident state. These are most common in border states to relieve residents of having to file returns in the non-resident state.
As more employees work from home instead of in the office, many employees are now working in states or localities other than those of the employer’s office. As a result, the employer may be required to withhold on those wages. Employers not registered in an employee’s home location may need to register for payroll taxes in such states. In addition to state income taxes, employers may also be required to withhold local income taxes where applicable.
Employers must also consider how employees working remotely may affect their own business taxes. To the extent employees are working from states in which a corporate employer does not have an office, such physical presence may result in corporation income tax obligations in those new states.
Some states have started to provide employers temporary relief from corporation income tax where COVID-19 has forced a portion of its employees to work from home in a state in which such employers would otherwise not have nexus. However, many businesses and their employees are re-evaluating the need for a common workspace and long commutes. Any permanent change in the way employees work will not be covered by such temporary relief.
A business may also be subject to new sales tax registration, collection, and filing requirements as a result of the location of a single telecommuting employee. The Wayfair decision eliminated the need for a physical presence in a state for a business to be subject to sales tax registration, collection, and filing but many states do not require registration unless minimum sales thresholds are reached. However, where such thresholds are not met, the physical presence rule is still relevant and an employee’s temporary work in the state may be sufficient to create a physical presence for the employer.
Employers will also have to consider many non-tax issues such as insurance, labor law, workers’ compensation policies, and data protection and confidentiality policies as information on employees’ laptops are no longer in secured office areas.
In summary, businesses expanding to the US must be aware of the state and local tax implications of telecommuting employees. Contact me if you have any queries.