Knowledge and Insights
As we all have witnessed over the last several months, the novel COVID-19 pandemic has changed the way the world works. Now, the physical location of businesses has less relevance. To meet social distancing guidelines and protect their employees while also keeping business rolling, most companies have asked employees to work remotely from their own houses or locations convenient to their employees. Now, employees can work in any place (i.e., their home, vacation home, parents’ home, etc.) in any city or state. For example, an employer’s regular work location may have been in New York, but their employees are working remotely from their vacation home at the shore in New Jersey. If the employer required remote work sites, then where are the employee’s wages earned?
These new circumstances have raised unique issues regarding wage income sourcing, state payroll tax withholding, and income taxability for both employers and employees. Here, we provide a glimpse of some state and local tax laws that employers and employees working remotely should consider.
Consideration for Employers:
Income tax withholding when the employee is living & working from home in a state different than their normal base of operations.
State income tax withholding is generally required for the state in which the employee’s services are performed, and not for the state in which the employee lives. Generally, the employer’s location is deemed the site of the employee’s services unless the employee is working at employer-designated sites in other jurisdictions.
An exception exists if that specific state has not imposed an income tax or there is a reciprocal agreement between the state where the employee works (where the service is performed) and where the employee lives. For instance, the reciprocal agreement between NJ and PA – if you work in NJ and live in PA your wages are only taxed in PA and your employer withholds PA taxes instead of NJ Taxes – and vice versa.
Some states that are not a part of a reciprocal agreement include Connecticut, Delaware, and New York, which have adopted the convenience of the employer rule explained below.
Generally… New York follows the convenience of the employer rule, in which the employer must withhold NY’s state income tax from all wages of the employee If the employee spends at least one day in NY, AND they are working from home outside of the state for the employee’s convenience. New York City follows NY State guidance.
- COVID-19 Rule: New York will provide relief to businesses that have employees working from home (outside of New York) due to COVID-19. However, businesses must confirm that such telework is necessary due to the employer’s needs, not just for the employee’s convenience. These businesses would then be exempt from New York income tax and income tax withholding.
Generally… The employer’s jurisdiction determines New Jersey Wage income.
- COVID-19 Rule: NJ Wage income will still be sourced as determined by the employer’s jurisdiction. This announcement is important for employers with NY-based employees who are teleworking from their homes in NJ due to NY’s convenience of the employer rule.
Generally… Nonresident employee compensation for services performed within Pennsylvania is subject to PA nonresident income tax and deduction unless there is a reciprocal agreement with the employee’s state (i.e. NJ/PA agreement noted above).
- COVID-19 Rule: PA will not consider temporary telework as a change in compensation source. Employee compensation for a PA employer is still subject to PA income tax and deduction laws regardless where the employee is working.
Generally… Philadelphia-based nonresidents teleworking from home for convenience are subject to PA Wage tax.
- COVID-19 Rule: If the employer’s base of operations is in Philadelphia, they are not required to withhold wages on nonresident employees if they must work outside the city as a requirement of their employment.
Generally… Massachusetts income from in-state employment is sourced to Massachusetts and subject to MA income tax and withholding.
- COVID-19 Rule: MA-resident employees teleworking from home and incurring income tax liability in another state due to that state’s sourcing rule will be eligible for a credit on those paid taxes. Additionally, their employer is not required to withhold Massachusetts income tax.
Consideration for Employees:
If you are currently working remotely in a different state than your employer and your permanent home due to COVID-19, then you might need to withhold and pay taxes in multiple states. This could impact your total tax bill, as different states have different tax rates. As outlined in the employer considerations noted above – each State is setting its own COVID exception rules – you must consider the general concepts of state taxation and discuss the impact with your tax advisor.
To fully understand and navigate these uncertainties you must consider and do the following:
- Know the residency rules of the state you are working from.
- There are two ways to qualify as a resident of a state:
- The first is domicile, which reflects an individual’s primary home – it is where you permanently reside and where you intend to return.
- The second is statutory residency, which considers an individual to be a statutory resident if they spend more than 183 days in that state’s jurisdiction. Any day in the jurisdiction whether you stay overnight or not is considered a resident day for purposes of the 183-day test.
- Determine state-specific guidance regarding COVID-19 and the time frame of any relief granted.
- Understand any reciprocity agreements and resident state credit rules
- For example, NY and NJ do not have a reciprocity agreement; If you work in NY and live in NJ, you will need to pay NY income taxes as a nonresident and additionally pay NJ income taxes as a resident. However, NJ residents can take a tax credit for taxes that have been paid to other jurisdictions in this case NY.
- Care needs to be taken in understanding how the credit may work especially if you are a statutory resident in one state, a permanent resident in another state and potentially have nonresident source income from a third state.
- Be prepared with all documentations and records. Detailed calendars and corroborating evidence like credit card bills, ez pass statements and cell phone bills that show location and help support your detailed calendar under audit. Planning should be done proactively for unforeseen future tax consequences.
Mercadien Tax Services Group is familiar with these and other specific state income tax rules and can provide more clarity on each individual situation and circumstances during these unprecedented times. If you have questions about your specific situation and would like to discuss further, please contact me at firstname.lastname@example.org or 609-689-9700.
DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.