Out-of-State Telecommuting & Tax Liability
Updated 10.19.2020 | In March, as coronavirus cases started to spike, a New York City-based software company mandated its employees to work from home. John, one of its software engineers, telecommuted from his apartment in nearby New Jersey; his co-worker, Linda, chose to work out of her parents’ home in Florida.
For this employer, and many others, the pandemic temporarily changed the geographic footprint of its workforce. As a result, the employer and its employees may be liable for additional state taxes.
What Determines an Employer’s State Tax Liability?
An organization’s tax liability is based on sufficient physical or economic presence within the state, which is known as a nexus. Each state has varying thresholds that corporations must meet before they are subject to taxation. Employees working remotely may create a nexus.
COVID-19 Waivers & Guidance by State
Some states have issued waivers or guidance to address taxes and COVID-related telecommuting. For example, Indiana announced that employees working remotely in the state, due to the pandemic, will not create a nexus. As of this publication, these states have issued waivers or guidance. These waivers are subject to change and some states are considering ending waivers now or in the near future. Click the links for details.
- The District of Columbia
- Illinois (liable after 30 days of working in state)
- Kentucky (case-by-case basis)
- New Jersey
- North Dakota
- Rhode Island
- South Carolina
Reciprocal Agreements & Convenience Rules
Keep in mind that some neighboring states have reciprocity agreements for employees who live and work in different states. For example, if someone lives in New Jersey and works in Pennsylvania, they won’t have Pennsylvania income taxes due to the reciprocal agreement between these two states.
Additionally, six states have a “convenience of the employer rule” wherein employees of companies based in these states will pay state taxes on compensation earned in another state due to the employee working remotely for their own “convenience” versus the employer’s necessity. Per the Tax Foundation, these states are Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania.
What about John and Linda?
In the example cited earlier, John and his employer will not be required to pay New Jersey taxes because it is one of the states that has waived any nexus that may be created due to the pandemic. In Linda’s case, Florida does not have income tax. However, because their company is based in New York, John and Linda will be liable for New York state taxes due to the state’s “convenience of the employer rule.”
Advice to Employers
As you can see, these situations can create complex issues with state taxes and liabilities. We recommend checking each employee’s situation that falls into multiple states and double-checking those states for the latest rules and updates. Each employee’s situation may be different and should be analyzed to determine how their income and state taxes should be reported.
Questions? Contact us.