The fallout from the impact of COVID-19 had and continues to have a significant impact on the way employers conduct business. Many employees continue to work on a remote basis much longer than initially anticipated. With the remote work concept still continuing to grow in prominence across the U.S., many states and localities continue to issue guidance relating to the income tax treatment of teleworking employees and business tax nexus policies. However, several policies, controversial in nature, continue to invite lawsuits even as the states continue to grapple with the long-term effects of a remote workforce.
The impacts felt include:
- State Withholding Tax: Many states issued specific guidelines over the last several months regarding the income tax withholding treatment of telecommuting employees working remotely from a different state as a result of the pandemic. States like Georgia, Maine, & Pennsylvania indicated that employer state income tax withholding requirements will not change during the time that employees are working remotely. These states also indicated that if an employee normally works in another state and is temporarily working in their resident state due to the pandemic, then wages earned during the period would not be subject to withholding tax in the resident state.
- Sourcing Of Income: Some states like Ohio enacted legislation providing various tax reliefs in response to the pandemic including a temporary provision that, for purposes of municipal income tax withholding.
- Litigation Over State Remote Work Tax Policies: Telecommuting tax policies adopted in both Massachusetts and New York have raised concerns in neighboring north-eastern states, to the extent that other states have begun challenging these rules in Court.
- Business Tax Nexus And Appointment Guidance: Employers are faced with the challenges of potentially additional business tax filing obligations as a result of employees telecommuting from jurisdictions in which the employer does not otherwise have a physical presence or other nexus. Approximately, one-third of the state-issued guidance providing for the temporary suspension of corporation income tax and/or sales and use tax nexus thresholds where the pandemic has forced certain employees to work remotely in a state in which the company would otherwise not have nexus.
- Business Income: Specific guidance relating to the impact of telecommuting employees on the apportionment of corporate or pass-through business income, were issued by certain states. But many states may not consider temporary changes in an employee’s physical work location to alter the apportionment of income during the periods in which temporary telework requirements are in place, or through a specific end-date. Some states however use a three-factor formula, regarding apportionment of income, comprising of receipts, payroll, and property specifying that employees working in their state due to the pandemic cannot enhance the numerator of their employer’s payroll factor.
Businesses benefitting from existing state or local incentive programs or agreements will need to evaluate the impact of a remote or reduced workforce on the ability of the business to satisfy specific job creation or employment requirements. Apart from providing temporary relief during the pandemic, states may also consider the long-term effects of the pandemic on traditional incentive programs.
Employers, in the near term, will also need to closely monitor state and local guidance issued on remote working, as it continues to evolve rapidly.
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