When the U.S. began to feel the full brunt of the COVID-19 pandemic, businesses from every industry transitioned their employees to remote working. Nearly a year later, many of those employees are still working remotely.
In July, we shared a post discussing the tax implications of remote workers and whether they created nexus. The situation has continued to evolve since then, so we’d like to share an update on the tax implications of remote workers.
When the pandemic first hit, many states were forced to consider whether remote workers would create “nexus,” which is the amount of contact from a company needed in order to be obligated to collect tax in a state. For many employers, this could create additional tax obligations in states where they previously did not have nexus. Additionally, questions arose regarding the taxation of employee’s income and which state would collect the tax.
As is often the case in the tax world, states came to a variety of answers. Some states specified they would not assert nexus on companies solely due to short-term telecommuting situations, others specified that employees displaced due to the ongoing pandemic would not create nexus, whereas others waived nexus for a period of time, but after that time had passed, remote workers would create nexus. Other states did not, and have yet to issue specific guidance on the subject.
This document from Hodgson Russ LLP offers a breakdown of remote working guidance on a state-by-state basis, including information on which state will tax the income of the remote worker.
As previously stated, states have come to differing conclusions on the subject. This has created sticky tax situations in a handful of cases, most notably in New England.
In October 2020, New Hampshire sued Massachusetts over the taxation of remote workers. The case eventually made its way to the U.S. Supreme Court, which in January 2021 asked the solicitor general to weigh in on whether it should hear the complaint.
In regards to income tax, New York issued controversial guidance in October 2020 that specified that if the employee was working remotely due to “convenience” rather than “necessity,” the tax would be sourced to the state where the employer is located. While it seems like most remote workers would fall into the “necessity” category due to the pandemic, Covington & Burling LLP explain that this is often not the case due to a specific list of factors that employees are required to satisfy in order to fit into that category.
Other states are applying similar rules, including Connecticut, Delaware and Pennsylvania.
Overall, the taxation of remote workers continues to create tax complications across the U.S., and as the pandemic continues, the tax implications will be felt by businesses and remote workers across the country.
To stay on top of your tax obligations due to remote workers, or any other tax situations, please contact us today. We’re happy to clarify any multi-state tax issues you’re trying to navigate.
