COVID-19 Work From Home State Tax Agreements

 |  COVID-19, News, Tax, Work from Home

COVID-19 may have created tax complications for companies with employees working from home in another state. To prevent tax surprises for you and your employees, understanding how to classify wages will avoid penalties and amending tax filings.
Both state unemployment and withholding taxes should generally be paid to the employee’s work state, but there are exceptions with some state laws. Be familiar with the state legislation that applies in your situation.
Reciprocity Tax Agreements
Employees who reside in the state where their employers are located are subject to income tax withholding rules of the state in which they work. There must be sufficient physical contact or presence, known as a nexus, with a state to require an employer to withhold state income taxes on an employee’s wages and register, file, and withhold state employment taxes. Some states that border each other have entered into agreements allowing employees who live in one state but work in another, to have their withholding tax paid to the work state.
For example, an employee who lives in Maryland but commutes to northern Virginia or D.C. for a job can have withholding tax paid to Maryland rather than the work state. Known as courtesy withholding, the employee can file one tax return each year to simplify things. Relevant employees must complete nonresidency certificates to excuse themselves from tax withholding in the work state. The company’s payroll provider should keep track of employees with these agreements in place.
Without a reciprocal agreement, an employee will have to pay both nonresident and resident state income tax. However, most states grant a tax credit to cover the cost of being taxed twice. Each state has its own laws on taxation. Check with each state and do not make any assumptions.
Unemployment Taxes
Unemployment taxes are usually straightforward. When an employee is working in multiple states or working remotely for a company based in another state, a company withholds state unemployment tax only in the state in which the employee is working.
Remote-Work Complications
Today’s remote-work world creates situations once unheard of a generation ago and causes tax complexity.
Consider an employee who works from home in upstate New York, but the company is located in Atlanta. You will have to pay all state taxes to New York because that is where the work is actually being completed.
Another example, the same Atlanta company has an employee who needs to work in Maine temporarily for three months. For nine months, you pay taxes in Georgia, and for three months, you pay taxes in the Pine Tree State.
Although this is general information, it can get complicated with exceptions and special circumstances.
Nexus Relief
According to The National Law Review, some state legislatures have addressed this situation by instituting nexus relief provisions that provide a safe harbor or waiver of state withholding and tax liability for remote work in different states during the pandemic. The relief is temporary and time period for relief varies by state. Generally, employers do not have to change their current state income and payroll tax withholdings due to telecommuting employees. States providing nexus relief typically waive under-withheld tax, penalties, and interest. There is no uniform nexus relief among the states, so employers should determine their withholding and reporting obligations state by state.
Similar to the relief provided by the states, the Internal Revenue Service is providing relief for purposes of determining federal income tax residency for certain nonresident alien individuals temporarily present in the United States because of COVID-19.
Whether you are an employee or employer, keep careful records on work locations and stay in contact with us about relevant rules in your area.

Need Guidance and Help?
If you need advice, give us a call and we will be happy to discuss your situation.