State and Local Tax Consequences of Remote Work

State and Local Tax Consequences of Remote Work

January 23, 2023

Agile organizations quickly adapted to remote work at the inception of the health crisis. Now, many workers—and companies—don’t want to go back to the old way of doing business and some states are starting to change their tune on taxation for remote employees.

The Remote Worker Tax Dilemma

Businesses with facilities in multiple states have long been aware of their tax obligations to those states. With the 2018 passage of South Dakota v. Wayfair, economic nexus also became a key consideration. Nexus—the establishment of a relationship—also comes into play with remote workers.

There’s no argument that an employee or contractor working out of Colorado benefits from the state’s roadways, fire protection services, parks, and playgrounds. Colorado, therefore, expects payroll taxes to help cover those expenses. It’s normal to expect that a company with remote employees in the state would collect and remit those funds to Colorado, but the twist is that the state where the company’s headquarters reside sometimes also expects the collection and remittance of payroll taxes for those same employees.

State Remote & Non-Resident Worker Rules

During the initial days of the pandemic, many states believed the remote-worker influx would be temporary, and graciously offered companies a pass for needing to register with their state to collect taxes for the temporary remote workers. However, as the years have worn on, the desire for normalcy—and the need for funding—has retracted some of those offerings.

Five northeastern states have long recognized the impact of workers that work for companies in one state while they reside in another.

  • New York
  • Delaware
  • Nebraska
  • New Jersey
  • Pennsylvania

Other states, such as Massachusetts, adopted rules during the pandemic that define tax and policy treatment (personal income and withholding tax, sales and use tax, corporate excise tax, and paid family and medical leave), while covered under a federal or state emergency order. As time has worn on, making taxation rules permanent, or adjusting them completely, is now on the table.

Double Taxation & Convenience Rules

Pre-pandemic non-resident regulations in New York and other states are referred to as convenience rules. Their legislative bodies determined that when workers reside outside of their state due to their preference or convenience, they too have the right to tax those individuals and companies, subjecting them to double taxation.

Many states allow taxpayers to receive credit for taxes paid in other states, while other states don’t. Federally, individuals operating pass-through entities can also get caught up in the $10,000 limit to state and local tax deductions.

Complications & Resolution

New York’s “convenience rule” no longer applies its tax code in a manner that reflects its name. In March 2020, healthcare workers who bravely risked their lives and set off to aid New York City during the health crisis unwittingly found themselves obligated to pay New York state payroll taxes as well as taxes to their own states if they hadn’t left before New York taxed their citizens—as in the case of Colorado and other states.

Tax obligations of individuals and companies in remote working situations are far from clear. Answers to the below questions are in high demand and may vary per state:

  • If a remote worker decides not to return to their prior residency state, when does their tax treatment change?
  • When do state sales and use tax obligations begin— when a company has employees or contractors working (1) temporarily or (2) permanently in different states?
  • Are corporate income taxes also required in states where employees or contractors reside?
  • Can and should a company require notification by remote workers of where they are performing their work?

We Welcome Your Questions

While the various state and federal tax rules are not unanimous or necessarily clear, REDW’s State and Local Tax (SALT) team is staying on top of these moving targets in each state. Our trusted advisors are ready to help you with tax planning options that strategically manage your obligations and minimize your risk and tax exposure.

Connect with our State and Local Tax team.

Insights from Americo Rodriguez, MST

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