COVID Brings Spotlight on State Taxation of Telecommuters
With the onset and persistence of the COVID-19 pandemic, more and more employers have had to promote or, at the very least, permit telecommuting (teleworking). Some experts are predicting that the teleworking trend will be here to stay for many, regardless of the pandemic resolution. 6 out of 10 employees have reported greater satisfaction with their work/life balance since beginning work from home, and many businesses have actually reported greater employee productivity and retention.
However, for many companies, this may mean that they now have employees working in states other than those that their business currently has an established taxable presence within. So what does the ‘work from home’ wave mean for your small business tax filing and preparation for 2020? How does state taxation of telecommuters affect your new operations model?
Employees Living and Working in Neighboring States
Fifteen states have reciprocal tax agreements with neighboring states where an employee resides in one state and is employed in the other. The State of West Virginia has reciprocal income tax agreements with Kentucky, Maryland, Virginia, Ohio and Pennsylvania. Reciprocal tax agreements mean that the employee is only responsible for filing taxes in their state of residence, not the state in which their employer is located.
For business owners, a reciprocal tax agreement means that it is not necessary to withhold taxes in the state of residence for their employee. However, if your state, or the state in which your employee lives or is temporarily working from, is not one of the 15 states that have agreements with some of their adjacent states (Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, Wisconsin) then there is a tax base nexus on both the state of residence for the employee and the state from which the income is earned.
Businesses are expected to withhold taxes for the employee in the state in which the work was performed, which can be a costly compliance for businesses that are not used to having their net income subject to taxation from multiple states. The employee will have to file taxes in both states, but will receive credits to avoid double taxation.
Both businesses and employees in this situation would benefit from the help of a professional CPA to help prepare and file their taxes appropriately to avoid the expensive consequences of confusion further down the road.
Employees Living and Working in States with No Reciprocal Agreement
As an employer, when you think of having a taxable presence in another state, you probably think that it warrants a physical branch or location. After all, sales alone in another state are not enough for that state to lay claim to any of your business income.
However, having just one employee in another state could be enough for that state to claim that you have an established workforce presence there. If your business makes considerable sales in outside states in which 1) you have no office or sales force located, 2) you do not service your goods there and use a common carrier to ship your goods there, or 3) have them come to your location for pick-up, then you have no tax base nexus there.
If, however, you now suddenly have even just one employee working in that state, then you may have established a taxable workforce presence there, and all of those sales could come into consideration when determining what percentage of your net income that state is allowed to tax.
This is where “nexus” and “apportionment” come into play. Tax base nexus determines whether or not a business’s presence within a state is sufficient enough for the state to tax any of the business’s activity. Apportionment determines how much of the business income is appropriate for the outside state to tax.
This can become even more complex if you have an employee that is teleworking from a state that is not their state of residence or a state that your business has established presence within. This has become more common with the COVID-19 pandemic as several individuals may have moved temporarily to other states to be with family, or to simply flee a ‘hot spot’ area of concern and wait it out. Some states begin to require those employees to file a non-resident return there the moment they begin working from that location. This means that you, as employer, would also need to withhold for that employee in that state during that time, which can be costly and confusing to navigate without CPA guidance.
Different states have vastly varying regulations with situations like these, so it is important for your employees to check how long their state of temporary residence allows them to work there without having to file and withhold taxes in that state.
Get Help from a CPA Near You for Telecommuting Taxation
Perry & Associates CPAs has multiple offices throughout the Mid- Ohio Valley, where many of these state working lines are crossed. Contact us for expert advice from an accountant that knows the intricacies of each state’s law.