Pandemic Payroll
by Bernadette Pinamont, JD, CPA
How a Permanent Remote Workforce Will Affect Taxes
Most businesses throughout the United States have introduced or expanded their work-from-home policies in the wake of the coronavirus (COVID-19) pandemic, forcing companies to adjust to remain operational. As organizations evaluate the impact of transforming their business models, they need to remember that many changes, including the remote work trend, come with tax consequences.
As the workforce continues to disperse, states will be taking a closer look at how their bottom lines are impacted. Some jurisdictions could change employee nexus rules, both as a way to continue to collect payroll taxes on those who work in a different state from their business’ physical office, but also as a financial recovery mechanism in a post-COVID world.
Payroll Tax Issues
The fight over payroll taxes has already begun. New Hampshire is facing off with New York and Massachusetts over residents who previously commuted to Boston and New York City for work but are now working from home in New Hampshire.
In March, Massachusetts established a rule that would tax out-of-state workers who used to commute to the state and extended that rule through the end of the year. New Hampshire contends that the rule is punishing its residents who have chosen not to travel to Boston for work.
New York has also decided to continue taxing workers who have left the state and gone remote. Any change in that plan could be very costly for the state, as it collects nearly one-fifth of its tax revenue from commuters.
These conflicts are the first of what will be many to erupt between states because they don’t want to lose payroll and income tax revenue. The general rule is that state income tax withholding is currently required for the state in which an employee provides services, not in the state where the employee resides. Exceptions exist for reciprocal agreement states, as well as five states (Connecticut, Delaware, Nebraska, New York, and Pennsylvania) that have a “convenience of the employer” rule that predates COVID-19.
Currently, most states have agreed on policies that promote administrative ease; as long as the employee’s current remote work location is temporary due to COVID-19, withholding requirements will not be imposed. However, this is likely to change as states grapple with budget deficits, even though some states, such as New York, have stated that its temporary remote work rule would be in force only as long as the governor’s emergency declaration is in place. Although many states’ initial emergency declarations may have expired, new ones are likely to be issued. Regardless of existing, expired, or new state emergency declarations, many employers are still choosing to keep their office doors shut until mid-2021.
Even if a payroll tax nexus were created and modeled specifically for the new remote work lifestyle, there will still be questions that businesses will need to ask to stay compliant: What happens when an employer mandates its employees work from home under the “convenience of the employer” rule, as some states have today? What happens when an employer opens its door but an employee, for various reasons, including health and safety, continues to work remotely? When does required to work remotely turn to voluntarily, and when does temporary become permanent? And how do these shifts impact the legacy payroll tax nexus rules?
Discussions about new nexus standards are happening in states across the country. There are too many unknowns for businesses to fully prepare, but they need to understand the environment they operate in, what drives policy shifts, and how they might be impacted. Even more crucial is the fact that once an employer has payroll tax nexus, it also has business nexus for other taxes in the state. Currently, an office location dictates payroll and business taxes, as opposed to an employee’s home state. Under new nexus rules, however, the home state of each employee could drive payroll and other tax nexuses.
CFOs and accountants can gain some insight and model potential scenarios the same way they would if they were planning to open a new office in a new state, taking sales and use, payroll, income, and other business taxes into account. Most importantly, business and finance leaders should provide critical information to lawmakers at the state level regarding business needs, challenges, and opportunities.
Through all of the uncertainty, one thing is certain—businesses will need to comply with evolving tax requirements one way or another as a result of their shifting workforce and operating model.
