The Covid-19 pandemic has affected our workforce. Companies were forced to react quickly to a work-from-home model for their employees. Many employees began working in states other than the states in which their assigned offices were located. As a result, questions have been raised as to whether the company has a corporation tax-sales and use tax link in the states where it has remote employees in the event that the company begins withholding wages earned by the employee based on the location of the remote employee, and whether the employee should file a foreign tax return in the state where he works remotely.
Nexus for business – corporate income taxes and sales and use taxes
Generally, states claim that an employee working from home or remotely within the state creates a context for the company. Nexus is used in tax law to describe a situation in which a company has a tax presence in a particular country. Therefore, the company is subject to state tax laws such as corporation or franchise taxes or sales and use taxes.
States have taken different approaches to nexus relief in response to the COVID-19 pandemic and have not issued many guidance on the subject. Depending on the state, some states have indicated that the context for corporate income tax and sales and use tax purposes will not be determined solely on the basis of employees working remotely due to the pandemic or when the state was under state order. However, some states have limited such nexus relief only to corporate income tax or franchise tax.
Companies need to track their employees and then understand the state tax laws, rules, and guidelines in those states to determine whether the company is subject to income tax, franchise tax, or sales and use tax liability.
Generally, states that levy personal income tax require a company to withhold income tax from a worker’s wages for wages earned in the state. In response to remote working regulations enacted (or required) as a result of the pandemic, many states have chosen not to enforce the employer’s withholding tax requirements if the only reason the employer would be subject to such requirements is a worker’s home or work at one remote place is as a result of the pandemic. For example, certain states have announced that employers should continue withholdings as if the employee continued to work on the employer’s premises during the pandemic, even if pre-pandemic withholding policies did not require withholding.
As with Nexus, not all states have issued guidelines to address withholding tax obligations during the pandemic. In addition, certain states seem to be indicating that they will not deviate from their normal withholding tax requirements due to the pandemic. Organizations should monitor such guidelines in the states where they have remote workers. Please note that it is possible that the state in which an employee is resident (state of residence) continues to impose withholding tax on employees, while the state in which employees work remotely (non-resident state) also imposes one on the employer new withholding tax liability imposed.
Employee income in a remote location (non-resident state)
In general, states require individuals who earn income in a state other than the state in which they reside (their “home state”) to file a non-resident tax return in that state. For example, if I work and live in Texas but travel to Louisiana to work, I must file a Louisiana tax return for the income I earned in Louisiana and pay Louisiana personal income tax.
If you work in more than one state during the year, these individuals likely owe the nonresident state money because they did not receive any withholding tax from their employer in that state. Generally, an individual pays the state of residence tax on all earned income and is credited for taxes paid to non-resident states.
Employees need to be proactive and inform their employer about the place they work and get such income. Employees need to be specific in terms of location, city, and county as these local authorities can also impose personal income tax on individuals. Remote workers must contact a tax advisor to ensure they do not have a tax return and obligation for the 2020 tax year in April 2021.
To sum up, businesses need to monitor state tax laws, regulations, and other guidelines published by states where employees work remotely (i.e., outside of their traditional offices) to determine if the presence of employees at their remote locations Relation to jobs and reluctance on the part of the employer can create obligations for the company. In addition, workers must also monitor guidelines published by states to determine if they need to file a non-resident income tax return in the state where workers work remotely and earn income.