Congratulations business owner! You’ve pivoted your business and learned how to keep your business going when your employees were ordered to stay at home. You have communicated with your clients and customers and found new ways to accomplish tasks. Breathe. Now that you have handled all the immediate pressing work of being a business owner in a pandemic, it is time to think about taxes. I know you don’t want to do it, but it is better to consider these issues now and prepare rather than at tax time. Who knows what the future will bring?
The challenge of the current coronavirus situation is that many employees are now working from home or alternate locations than their usual places of work. Each state has its own guidelines and interpretations of what constitutes nexus. The nexus guidelines and interpretations used by the states are not just implications for employee’s income tax withholding requirements, but for other state reporting and filing requirements, such as for unemployment benefits or even income taxes on the business entity due to the employee’s presence in the state.
Over the course of three articles we will examine three components of remote work and business tax obligations. First, we will look at the tax obligations related to withholding on employee wages. Second, we will examine the business entity related tax liability issues. Lastly, we will review the types of questions your employees may have. Many of these scenarios have a wide variety of answers and most can depend on the jurisdictions and taxing authorities that touch each one.
Employee Wages and Tax Obligation Considerations
State laws dictate the withholding requirements on employees’ wages. The withholding standard varies based on location. Usually, the employee’s primary state of residence has principal authority over the individual’s income, however, the primary location of the employee’s work performance is the state to which state income tax is due. This can create complications and frustrations not only for the employer who must determine their withholding obligations, but also for employee who must prepare the appropriate withholding documents and state tax return filings. Frequently, there is a either a reciprocity agreement between border states or the employee may take credit in the home state for taxes paid to the work state. Some states do have an alternate agreement, where the credit is taken in the nonresident state. The basic theory is that the employee is not double taxed at the state level on the same income.
Remote workers most often owe state taxes to the state in which they are working, regardless of the employer’s location. (There are special rules in place for military spouses, which is outside the scope of this article.) When employees shift locations for work performance, it may prompt a need for new withholding documents to be prepared and processed. Some jurisdictions do have convenience of the employer tests which may dictate which state withholding is required.
Obligations of an employer to withhold state income tax are further complicated by the varying rules of each state for the threshold at which an employer must withhold. Some states have income-based measures, others have rules based on the number of days a non-resident is working within the state and to complicate the rules even more, the states are not often in sync with one another. It may even be required for the business to register as doing business within the state, even if their only connection is a remote employee.
The COVID-19 pandemic may have also created further confusion around employer and employee state tax obligations, because an employee may have been in a situation where they are performing work in a state that is neither their state of domicile or nor their regular place of employment. An example may be someone that traveled to another state and was stuck due to lockdown and travel restrictions or remained in the third state to assist a family member or otherwise limit their exposure to the coronavirus. Thus, it could be that this third state’s withholding, statutory residence or other filing obligation thresholds may have been triggered.
As mentioned before, employees teleworking or otherwise working remotely in a state where an employer does not have any other business may create nexus with that new state. It is important for employers to understand the implications of withholding from employment income. Possible challenges include penalties for insufficient deposits if required to withhold, inadvertently creating nexus in a state by voluntarily withholding for employees when not otherwise required to do so, and knowing the differences between any legal thresholds for required withholdings and those rules and regulations that govern the threshold for employer income taxability.
Check your State(s)
Some states have created pandemic-friendly rules. A few have waived nexus for businesses that have employees working remotely during the pandemic or with active stay at home orders. Those locations have stated that employees working from those jurisdictions do not, by themselves, create nexus for their employers.
One final thought on teleworking employees and their wages – does the state in which the employee is working have a different minimum wage than the normal place of work? If so, are the wages of any employees required to be adjusted for this new remote jurisdiction?
Questions for Businesses
So, what do businesses need to know?
- Where all their employees are currently performing work?
- How long have they been/do they expect to work in those locations?
- What is the state’s threshold hold employer obligated income tax withholding on employee wages?
- What is the state’s nexus rules for business entity tax liability?
- Have all the state unemployment obligations been met?
- Does any new state in which they have employees require a higher minimum wage?
More Guidance is Needed
It is clear that more guidance is needed. States and local jurisdictions are grappling with how to maintain their day to day business activities, as well devise plans to assist the businesses in their areas. Additional guidance is needed for the wide variety of tax implications for businesses. The best course of action is to be informed, work with a tax professional, and be prepared for more changes on the horizon.
If you need help navigating tax issues for your business, we will be happy to assist. Please contact us.
Written by Erin Kidd, EA, AFC®, MBA:
Erin Kidd is the Tax Individual Practice Supervisor at Thompson Greenspon and has nearly a decade of tax experience specializing in individual taxation. Throughout her career, she has focused on simplifying complex tax issues and educating clients to maximize their tax benefits and plan for future events. Erin is responsible for the review of individual Federal and multi-state tax returns, managing the firm’s Military Spouse Remote Preparer Program, preparation of individual tax returns with international taxation and reporting requirements, and assisting with the resolution of client issues with Federal and State Taxing Authorities.
Erin holds a Bachelor’s and Master’s Degree in Business Administration from Morehead State University, is an Enrolled Agent, a federally licensed tax preparer who has unlimited rights to practice before the IRS, and an Accredited Financial Counselor ®. She has been recognized by the Garrison Commands of West Point, NY and Fort Leavenworth, KS for her contributions to the military community for her work with the installations’ Volunteer Income Tax Assistance Centers.
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