Other states have a threshold like IllinoisNew York's is 14 days, for example," Kane says. State Income Tax & Withholding Issues for Remote Employees - Brown Edwards As of 2022, 16 statesArizona, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsinand the District of Columbia have reciprocal tax agreements in place. . Employers are responsible for withholding federal income taxes, FICA taxes (Social Security and Medicare), and federal unemployment taxes (FUTA) for remote employees. In a remote-working environment, that challenge has increased. Whose Convenience Generates State Income Tax Withholding Headaches Thus, Telebright is an important reminder of the position taxing authorities can take, as this column next delves deeper into the issues raised by a growing remote workforce. Nonresident who work in Connecticut Six states have adopted the convenience of the employer rule: Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania. 12See N.Y. Comp. How can data and technology help deliver a high-quality audit? Your employer should initiate a tax compliance review when it is made aware of a remote employee's new location. Pursuant to New York Department memorandum TSB-M-06(5)I, for tax years beginning in 2006, a day of work spent at a home office is treated as a day worked outside of New York "if the taxpayers home office is a bona fide employer office." Remote Workers Alter State Taxes - CFO Last year, Ariele Doolittle, a tax lawyer, got a call from a client who lived and worked in New York but was considering working remotely from California temporarily . I've always set my state withholding in MD to zero and made estimate tax payments in NY, and only filed NY taxes. What should tax departments and tax professionals do? In general, an employer is required to withhold income tax and remit it to the state (and local, if applicable, which adds an additional dimension) jurisdiction in which the employee performs the work. New York State Withholding Certificate (IT-2104) Connecticut provides a resident credit "against the [income] tax otherwise due [to Connecticut] for any income tax imposed on such resident for the taxable year by another state of the United States or a political subdivision thereof on income derived from sources therein" that are also subject to taxation by Connecticut. Generally Philadelphia-based nonresidents teleworking from home for convenience are subject to PA Wage tax. Determine state-specific guidance regarding COVID-19 and the time frame of any relief granted. All of these apportionment changes can first be expected to affect quarterly financial statement reporting and estimated payments, then ultimately the preparation and filing of state and local income and franchise tax returns. State and local taxes apply to an employee's state of residence and the state where the employee works. The factors are divided into three categories: Primary, Secondary or Other factors. For example, an employers 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. To be considered "bona fide," an employer office must satisfy either (1) a primary factor or (2) at least four secondary and three other factors. Live in NJ and Work in NYC: 2023 Tax Guide | StreetEasy Blog Read ourprivacy policyto learn more. In sum, the New Jersey Divisions guidance follows the sourcing rules of the employers jurisdiction during the COVID-19 pandemic. A remote employee could negate a company's existing P.L. Text. Enter your name and email for the latest updates. It's crucial that businesses understand the potential state tax . Depending on what your remote . Codes R. & Regs., tit. How to Pay Out of State Remote Employees and Contractors - Gusto The number of hybrid and remote employees has greatly increased since the onset of the pandemic. How do you move long-term value creation from ambition to action? Proactive opportunities include addressing remote hiring practices to maintain current no-nexus positions, determining the optimal legal entity for hiring remote workers in new states, establishing systems and processes to gather data on actual remote work time and locations, understanding what job functions and responsibilities remote employees have in claimed P.L. Before you pay a remote contractor, you'll also need to have them fill out a W-9: Request for Taxpayer Identification Number and Certification. Because of the COVID-19 pandemic, John has not crossed the Hudson River and set foot in New York at all. If you would like more information regarding the exception to the New York convenience of the employer rule, or if you have received a desk audit notice or questionnaire from the Department regarding your allocation of income to New York and you need guidance, pleasecontact us. Code tit. If this status is established, days spent working at home outside of New York will not count as New York-based days and, therefore, will not be taxed by New York. New York-Based Employees Who Work Remotely Out-of-State Are - PLLC , No. State Taxes for Remote WorkWho Do I Pay Taxes To, Anyway? - 1040.com 21See also Yesnowitz, Sherr, Bell-Jacobs, "AICPA Focuses Advocacy Efforts on Mobile Workforce Legislation,"52The Tax Adviser50 (January 2021). No. Code tit. Remote employees are employees who work outside of the office setting and are on a companys payroll, while independent contractors are self-employed and responsible for managing their own taxes. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. Under the New York convenience of the employer rule, the wages of an individual who is a resident of a state other than New York but who works for a New York-based employer, are considered to constitute New York source income unless, out of necessity, the employee is obligated to work outside of the state. Below is a review of critical state and federal tax . The New York Department of Taxation and Finance has finally provided guidance regarding telecommuting tax liability for nonresident employees working outside of New York because of the COVID-19 pandemic. Nexus created by remote-working employees can create significant tax liabilities in new jurisdictions, especially for income tax purposes where the company has significant receipts from the state and the state apportions using a single sales factor formula. In sum, most taxpayers who are assigned to work in New York but are working from home outside of New York may still need to allocate income tax for work-from-home days to New York in order to comply with the current guidance issued by New York. While this is the exception to the general rule, the following jurisdictions apply a convenience-of-the-employer standard: Arkansas,6 Connecticut,7 Delaware8 (and Wilmington9), Massachusetts,10 Nebraska,11 New York state,12 certain Ohio municipalities,13 and Pennsylvania14 (and Philadelphia15). The state and local tax effects of telecommuting range far and wide, from business income tax and sales tax to payroll tax. Our network of dedicated state and local tax professionals combines technical knowledge with industry understanding and access to technologically advanced tools and methodologies. Payroll is often the largest single cost component when sourcing under this method, and service businesses are more likely to have remote workers than traditional sellers of tangible personal property. Association of International Certified Professional Accountants. Remote worker state income tax implications. New York City follows NY State guidance. Remote work creates a spectrum of state and local tax issues Some states have crafted nexus waivers during the pandemic, whereby they explicitly stated that the presence of a remote employee working in the state solely due to the pandemic would not create nexus for certain taxes. On October 19, 2020, New Hampshire filed an original jurisdiction suit against Massachusetts in the United States Supreme Court, challenging Massachusetts taxation of New Hampshire residents who telecommute to Massachusetts during the COVID-19 pandemic. New York Tax Officials Crack Down on Remote Workers - WSJ The CARES Act credit was effective March 20 to Dec. 31, 2020, and was equal to 50% of qualified wages. Social Security: In 2021, a flat rate of 6.2 percent will apply to wages up to $142,800. Meanwhile, nonresident taxpayers working in other convenience-of-the-employer jurisdictions should consider whether to file similar refund actions challenging the convenience-of-the-employer rules. Discover how EY insights and services are helping to reframe the future of your industry. The primary factor is met if a home office is near a facility that is required for doing the job that the employers office cannot provide. Another example is the likely impact on personal property and sales and use taxes as the purchase and ownership of tangible property shifts from its traditional location to the decentralized world of remote office and remote workers. Market-based sourcing may yield the same types of indirect implications seen with sales of tangible personal property, including shifts in where the benefits are received by customers. Most of these notices were issued in the form of a desk audit, which is automatically generated when the Departments system notes a discrepancy in a tax return from a prior year filing. On January 25, 2021, the Supreme Court expressed more interest in this case, asking the solicitor general of the United States to provide the federal governments position on New Hampshires current challenge. It also is a key driver of a taxpayer's effective tax rate for financial statement reporting of current and deferred taxes. . Code 22-003.01C(1). 20P.L. State and local taxes can significantly impact a companys cash flow, effective tax rate and risk profile. The FAQ confirmed that if a nonresident employee whose primary office is in New York State is telecommuting from outside the state due to the . 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. See also Bell-Jacobs, McCann, Wlodychak, "Where Individual, Corporate, and Passthrough Entity Taxation Meet," 52The Tax Adviser392 (June 2021). The Department stated, if you are a nonresident whose primary office is in New York State, your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location.. Working from an out-of-state home does not mean you can skip paying New York taxes. Now, employees can work in any place (i.e., their home, vacation home, parents home, etc.) New York City follows NY State guidance. 7/22/21) (petition filed). Experian and the Experian trademarks used herein are trademarks or registered trademarks of Experian. For more information about our organization, please visit ey.com. New York can choose to innovate, crafting a 21st-century tax code that invites businesses and workers alike, or it can stagnate, digging in its heels and trying to force out-of-state taxpayers to . This is the maximum you can save in your 401 (k) plan in 2021. With this in mind, in providing a credit, Connecticut may take the position that it does not credit taxes paid by a Connecticut resident to another state if they worked in that state for 15 or fewer days. Challenges of Payroll Tax Withholding For Remote Employees 2012), the New Jersey Superior Court's Appellate Division affirmed that an out-of-state employer could be liable for the state's corporation business tax (CBT) by virtue of one employee telecommuting from the state. 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. See Form IT-2104.1, New York State, City of New York, and City of Yonkers Certificate of Nonresidence and Allocation of Withholding Tax. During July 2021, in the aftermath of the denial of certiorari in New Hampshire v. Massachusetts, a professor filed suit in New York challenging the state's convenience-of-the-employer rule.18 Professor Edward Zelinsky is a Connecticut resident, employed at a New York university, and working part time from home. New York has traditionally been aggressive in auditing high-net-worth individuals returns to determine whether they are paying the proper amount of income tax to New York. This is known as the "convenience of the employer" rule. The reader is advised to contact a tax professional prior to taking any action based upon this information. EY is a global leader in assurance, consulting, strategy and transactions, and tax services. [4] TSB-M-06 (5) (May15, 2006). 5For a further discussion of the erosion of nexus protection and the burden on small businesses, see Stanton, "Erosion of Nexus Protection and the Burden on Small Businesses," 52The Tax Adviser182 (March 2021). There have been recent attempts to limit the federal law, most notably the Multistate Tax Commission's guidance, which seeks to address how the law should (or should not) apply in the modern world.5 However, the federal law is still valid, and some companies continue to claim its protection. It is worth examining this case in more detail. of Tax. Experian Employer Services Tax Withholding Services can assist companies in determining the proper state tax withholding for remote and on-site employees. States with no income tax, such as Texas and Washington, are popular for remote workers, but they may be responsible for other taxes or mandatory employee benefits. March 12, 2021. New York Provides Guidance Regarding MCTMT | Deloitte US | Tax The insights and services we provide help to create long-term value for clients, people and society, and to build trust in the capital markets. Moreover, it would likely be internally inconsistent, as discussed in the Wynne case (based on a former Maryland taxing scheme), and thus unconstitutional, to deny a credit in this situation, as it would lead to impermissible double taxation. in any city or state. This means that the New York Department is likely to allocate to New York the taxes attributable to most work-from-home days for employees who are assigned to work in New York but work remotely outside of the state due to the pandemic. In response to the COVID-19 pandemic, New Jersey issued specific guidance granting relief regarding the income [?] 54A:4-1(a) provides New Jersey resident taxpayers with a "credit against tax otherwise due for the amount of any income tax or wage tax imposed for the taxable year by another state of the United States or political subdivision of such state," for income also subject to tax under the Gross Income Tax Act. The onset of the COVID-19 pandemic in March 2020, coupled with the rise in New York individual income tax rates that became effective in April 2021, spurred many individuals to move out of New York and change their tax domicile to a low- or no-tax state such as Florida. Posted: September 21, 2021. Do Not Sell or Share My Personal Information. Some of those secondary and other factors include: As you might imagine, it is not especially easy to meet a sufficient number of the required factors, although with careful planning and cooperation by the employer, it may be possible. Arkansas recently enacted legislation reversing the state's "convenience" rule, retroactive to Jan. 1, 2021 (Ark. Thus, employers who decide not to withhold on the full amount of an employee's salary should have well-crafted policies that explicitly lay out the terms of the employer's requirement that the employee work from home permanently or for a set amount of time to ensure that on audit the policy and position will withstand scrutiny. State and local income and franchise tax apportionment formulas are based on a receipts factor and, in some cases, still include a property and payroll factor. However, adding to the complexity, a handful of jurisdictions take a different approach by applying a "convenience of the employer" rule that provides that only if an employer requires an employee to work from a different jurisdiction is the employee not subject to tax at the employer's normal work location. Working remotely: making the convenience rule work for telecommuting - EY Visit www.tax.nys.gov (search: IT-2104-I) or scan the QR code below. Div. The credit is subject to a limitation that it "shall not exceed the proportion of the tax otherwise due [under the Gross Income Tax Act] that the amount of the taxpayers income subject to tax by the other jurisdiction bears to [the taxpayers] entire New Jersey income." If your W-2 lists a state other than your state . 12-711(b)(2)(C); Conn. Rev. New York State's View on Telecommuting and an Opening Regarding New These types of considerations should be incorporated into the overall analysis of apportionment factors and effective tax rates. & Fin., Technical Memorandum No. 16"Massachusetts Source Income of Non-Residents Telecommuting Due to the COVID-19 Pandemic," 830 Mass. This means that a Connecticut resident assigned to work in New York but working from home in Connecticut will likely be entitled to a credit for taxes paid to New York, subject to the general resident credit limitations. Loves intellectual debates on various topics. DISCLAIMER: This advisory resource is for general information purposes only. Managing employee tax withholding has always been challenging for many employers, but the COVID-19 pandemic and the resulting increase in remote work has introduced new tax nexus considerations and further complicated the process. Codes R. & Regs., tit. State tax withholding for remote employees can be very facts and circumstances based, so two situations that may look identical can be different. Connecticut recently introduced a limited convenience rule, beginning in tax year 2019. That said, your employer state may be able to claim you as a resident too. New Yorks longstanding convenience of the employer rule. 62.5A.3 (as most recently proposed Dec. 8, 2020). The employee worked from New Jersey writing software code for the company, which was incorporated into a web application provided to TeleBright's clients. Georgia or New York. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. However, ongoing litigation may change the current landscape. 1019 (S.B. However, due to the New York convenience of the employer rule, unless it can be shown that John must work from home out of necessity, every day spent working from his home in New Jersey will be counted as New York working days, and John will be taxed by New York on all his wage income. Thus, Pennsylvania adopted a status quo approach. Validated by In response, TeleBright asserted that it was not "doing business" in the state and further challenged the Division's position based on both Due Process and Commerce Clause grounds under the U.S. Constitution. Review ourcookie policyfor more information. Currently, there are 16 states including District of Columbia with reciprocal tax agreements in place: A sales tax nexus refers to a connection a business has to a state. The change is analogous to the one emphasized in Wayfair, in which transformations in the economy and technology were pointed to by the Court and the state as reasons for reexamining the law and changing course.As Zelinsky's case makes its way through the New York courts, nonresident taxpayers employed in New York, but working remotely or on a hybrid basis, should consider filing protective refund claims. Receipts from sales of tangible personal property are generally sourced to the delivery location. ,419 U.S. 560 (1975) (the presence of one employee within the state of Washington was sufficient to subject the company to the state's business and occupation tax without violating due process); See Pa. Dep't of Rev., "Telework Guidance," available, Telework Guidance Updated 08/03/2021," available at, For a further discussion of the erosion of nexus protection and the burden on small businesses, see Stanton, ". But the pandemic also has brought one change that is a welcome relief to many employees: remote work. Publication NYS-50, Employer's Guide to Unemployment Insurance, Wage Reporting, and Withholding Tax; Withholding tax rate changes; Withholding publications and guidance; Withholding forms and . Whether due to a disinterest in addressing the issue or questions over standing, the U.S. Supreme Court ultimately deniedcertiorari. NJ/PA agreement noted above). A tax nexus is a states determination that an organization has a presence in the jurisdiction. Servs., 2020 Form CT-1040. January 26, 2023 by Rudy Mahanta, CPP. The pandemic has upended life as we knew it. Although many employees have returned to working on location again, factors indicate that the labor . In turn, many employers have already decided to move to a fully remote workforce or a hybrid approach allowing employees to work from home for some portion of time. Naturally, this law has been challenged. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.