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The Cross-Border Tax Peaks and Valleys of Working From Anywhere

July 7, 2022, 8:46 AM

Over the past decade, some employees in the business world worked remotely, at least on occasion. However, working remotely took on a new, necessary role for many more employees early in 2020. According to the Bureau of Labor Statistics 2021 Business Response Survey, 34.5% of establishments increased telework for some or all employees nationwide.

As businesses slowly start to resume new-normal operations, worker desires and expectations to continue working remotely remain. Some employers have transitioned to a fully remote workforce or even a hybrid approach where they allow employees to work from home for some portion of time. Others are still contemplating whether to make this change permanent.

While the perks of remote working remain a compelling peak in the topography for job satisfaction, employees and employers alike need to also consider some valleys that accompany remote work.

And there is a big one: taxes.

Available Workarounds

Employment-related income tax is a top-of-mind category for both employers and employees. The failure of employers to properly withhold state and local income taxes from employee pay can result in liabilities on behalf of both the employer and the employee. In general, the rule for state and local income tax withholding is that taxes should be withheld for the jurisdiction in which the employee performed the services. When workers live in the same state in which they work, the overall compliance obligation is simple. Things are a bit trickier when multiple taxing jurisdictions are involved.

Thankfully, there are some workarounds that provide relief to taxpayers and their employers that find themselves into the latter category.

First is the idea of reciprocity. When the state in which the employer is located is different than the employee’s state of residence, employees will generally need to file an income tax return in both states. However, it’s important to understand whether the two states have entered into a reciprocal agreement. In such a case, the employer withholds only in the employee’s state of residence. A reciprocal agreement eliminates the employee’s obligation to file for a credit for taxes paid to another state. It is worth noting that many states do not provide individual income tax reciprocity.

Second is the act of demonstrating that an employee’s work is required by the employer to be performed remotely. In five states that have a convenience-of-the-employer rule—Connecticut, Delaware, Nebraska, New York, Pennsylvania—withholding is based on where the employer is located unless the telecommuting is required by the employer. On the other hand, if an employee works from a different location for his or her convenience but is not required to do so, those states impose income tax on the employee based on the employer’s location as well.

Another issue that complicates the state income taxation of remote workers is that states vary in how many days a non-resident employee can work in a non-resident state before withholding is required. Some of the various thresholds that states have before requiring withholding and state income tax liability for non-residents working in that state are categorized by the Mobile Workforce Coalition in groups of very friendly, moderately friendly, unfriendly, and very unfriendly.

For example, Hawaii is classified as very friendly, with a threshold of more than 60 days in a calendar year; Louisiana is classified as moderately friendly with a threshold of more than 25 days in a calendar year; Maine is classified as unfriendly with a threshold of more than 12 days in a calendar year; and New York is classified as very unfriendly, requiring an individual to file on the first day even if the employer isn’t required to withhold on the first day.

Current withholding rules for employers and employees navigating remote work can vary greatly. The American Institute of Certified Public Accountants is working with the Council on State Taxation on mobile workforce federal legislation and a model state act to help provide a reasonable uniform rule for all states. The current variation in states is shown below.

To bring more uniformity and consistency, over the past few years several states have enacted, and several more states have considered, a threshold model legislation supported by the AICPA, COST, and the Tax Executives Institute.

As a result of advocacy efforts, members of Congress have recognized these variations and complications and introduced legislation to address the state income taxation of remote and mobile workers—the Remote and Mobile Worker Relief Act of 2021 (S. 1274); the Mobile Workforce State Income Tax Simplification Act of 2021 (H.R. 429); and the Multistate Worker Tax Fairness Act (S. 1887, H.R. 4267).

S. 1274 and H.R. 429 would prevent states from taxing or requiring state income tax withholding on non-resident employees in the state for less than 30 days. S. 1274 provides specific pandemic relief until Dec. 31, 2021, or until 90% of employees return to office. S. 1887 and H.R. 4267 address the convenience-of-the-employer rule and limit states from taxing compensation earned by nonresident telecommuters and multistate workers.

In addition to withholding taxes, employers also focus on a broad array of other state and local tax issues. Absent any special waiver, a remote employee can create nexus for various taxes, including income taxes, gross receipts taxes, sales taxes, and local business taxes. All of these present a rapidly changing range of impacts on effective rates and financial statement reporting, registrations, tax compliance, data gathering, and documentation. Thus, factors such as nexus, apportionment, tax compliance, and financial statement reporting should all be carefully considered.

Regarding nexus, the majority of states take the position that a telecommuting employee creates sufficient nexus to subject an employer to the state’s business taxes. As welcome relief, some states created temporary nexus-inducing exceptions during the pandemic whereby the mere presence of a remotely working employee in the state due to the pandemic did not create nexus for certain taxes. However, most of these exceptions have since expired.

Overall, one of the most important steps employers can take is to carefully document each employee’s remote-work arrangements, past, present, and future. Tax professionals can help employers and employees address these evolving state and local tax issues. In addition, tax professionals and business owners alike can navigate the complex world of state and local taxes with the AICPA SALT Roadmap — State and Local Tax Guide, a compilation of basic state information and quick links to other state references.

Fully remote and hybrid work environments have become a standard in today’s workforce. If an employer embraces hybrid or remote as options for their staff, it’s important for them to understand the state tax laws and other tax implications surrounding that decision.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Sarah Shannonhouse is a manager with the tax practice and ethics team at the AICPA. One area of her focus is state and local taxes.

Eileen Sherr is the director of tax policy and advocacy with the AICPA. Her expertise includes state and local taxes and remote work.

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