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COVID-19 and State Tax Challenges with Telecommuting Employees

As many employees continue to work from home due to the COVID-19 pandemic, those companies who employ telecommuters are navigating through the state tax (or non-tax) implications of telework.
As a general rule, state income tax withholding is required in the state in which the employee’s services are performed, not the state in which the employee resides. Exceptions apply if the specific state does not impose an income tax or if a reciprocal agreement exists between the state where the employee works (i.e. where the service is rendered) and where the employee resides.
In addition, a few jurisdictions, including New York, impose a “convenience of the employer” rule under which a non-resident employee is subject to New York personal income tax on income earned when the employee is working from the non-resident location at the employee’s convenience, rather than as a requirement of the employer. This can result in situations in which the employee is subject to withholding from both the resident and non-resident jurisdictions. While these situations often can be remediated through the use of a credit for taxes paid, such credits are not consistent from state to state, and in some cases do not provide actual relief from double taxation.
Some states have announced policies regarding the tax implications and state filing requirements, which generally provide some form of amnesty for nexus or withholding. Employers may not know, however, if their employees are telecommuting from new states, or if those employees wish to do so permanently.
These considerations have become more complex and the urgency of employers’ need to respond to these considerations is increasing:
  • Many states have not announced any tax-related policy guidance in this area. This may give businesses an uneasy feeling about having telecommuters in these states, because states’ pandemic-driven economic worries create incentives for them to seek new sources of generating revenue.
  • For states with amnesty policies, employers run the risk of having any telecommuters in those areas seek to convert from temporary to permanent telework status--a request that if granted would disqualify those employers (and the employees) from otherwise available amnesty protections.
  • Federal intervention remains a possibility but is unclear at this time, with several bills recently introduced to restrict the nexus and withholding implications of COVID-19-related telework.
Generally, states will conclude their COVID-19 leniency of tax rules at the end of 2020 and will look for ways to increase tax revenues.  Therefore, it is important that both employers and employees become more knowledgeable with respect to the consequences of telecommuting arrangements so that these issues can be addressed before they cannot be reversed.
 For more information, contact Michael Ceschini at