Government mandated work-from-home orders have created a remote workforce, creating a host of complex state and local tax issues for both employers and their employees. Even as these orders expire, a common trend among employers is to implement flexible, long-term (and in some cases permanent) work-from-home arrangements.
Among the many important issues for employers to consider will be whether they will now be subject to various business taxes in the state or local jurisdiction where the employee is working remotely (e.g., sales, income, franchise taxes) and whether the employer should be withholding state and local income taxes from the employee’s paycheck in the remote work jurisdiction. Additionally, it is important for employees teleworking to understand the extent to which they are subject to income taxes in each jurisdiction, to ensure they file proper individual income tax returns.
Business Tax Nexus
The physical presence of a single employee working remotely in a state could be sufficient to establish business tax nexus between an employer and that state. If tax nexus is established, the employer may be required to comply with the tax laws of that state and may be responsible for registering for and paying business income and franchise taxes, sales and uses taxes, and other taxes in the state that the employer is not ordinarily accustomed to paying.
Employer Income Tax Withholding
States typically require an employer to withhold from an employee’s paycheck an amount sufficient to cover the expected state income tax liability incurred by the employee. Generally, employees are subject to income tax withholding in the state and city where they are performing services.
If an employee teleworks in a different state, they are generally subject to income tax withholding in the employer’s state and could also be subject to income tax withholding in their state of residence. However, in some cases, reciprocal agreements between states prevent the employee from being subject to multiple withholding. In addition to state income tax withholding, cities with an income tax also require employers to withhold city incomes for both resident and non-resident employees performing services in the city.
If an employee is no longer performing services in a city that imposes an income tax, careful consideration should be given as to whether that employee is still subject to city income tax withholding in a particular jurisdiction.
Read the full article in the March/April 2021 issue of Corp! Magazine.
About the author:
Cody Attisha focuses on taxation law, corporate law, mergers and acquisitions, finance, and estate and trust planning. He also helps clients with entity formation, including evaluating, choosing, and implementing the right partnership, corporate, or non-profit structure.
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