By Michael Semes and Amy Traub (BakerHostetler)
During the pandemic, many employees were prohibited from coming into their assigned office and were required to perform their work remotely. This meant that a number of employees were working in state and local jurisdictions different from the jurisdictions of their assigned office. Now that states have moved away from most pandemic-related restrictions, employers are faced with the all-important question of
whether they will continue a remote work policy.
While more employees than ever are requesting continued hybrid or full-time remote work
arrangements, employers must consider not just issues of recruitment, morale and retention, but also the employment law and tax implications of continuing such arrangements.
Employment law perspective.
From an employment law perspective, the primary question is which state’s laws apply to the employee. Employers must know the answer to this question as it pertains to a wide variety of issues, including anti-discrimination laws, benefits coverage, equal pay, expense reimbursement, Family and Medical Leave Act (FMLA; Payroll Guide ¶20,260 ) laws, Occupational Safety and Health Administration (OSHA) reporting, paid sick leave and other paid time off, restrictive covenants, training requirements, unemployment compensation, wage and hour laws, and workers’
From a tax perspective, employers opting to continue remote work arrangements must also ask whether they are required to change their manner of withholding. The good news (Massachusetts/New Hampshire example below) is that many taxing jurisdictions relaxed their rules during the pandemic so that an employer could continue as if the employee were working in the office. Not all states, however, relaxed their rules in the same way.
For instance, Pennsylvania relaxed its withholding and entity-level subjectivity rules, while
Massachusetts relaxed its subjectivity rules but not its withholding rules. As a result, a Massachusetts employer with a New Hampshire resident employee working at home was still required to withhold Massachusetts tax for that employee – even though the public health rules prohibited employees from coming into the Massachusetts office and New Hampshire does not impose a personal income tax.
Supreme Court case on taxation.
If you think it doesn’t sound fair that Massachusetts could tax an employee who works an entire year in New Hampshire and has absolutely no contact with Massachusetts, you are not alone.
While that may likely be the proper conclusion, the Supreme Court declined to hear the case on the basis that it was the employee – not the State of New Hampshire – that was the proper party to bring the case.
Similar state positions.
Before, during and after the pandemic, New York has taken the same position as Massachusetts (imposing what is known as the “convenience of the employer rule”; Payroll Guide ¶8402 ). Under this rule, which may be viewed as a misnomer, a state taxes an employee based on the office to which the employee is assigned unless the employer requires (for the employer’s convenience) the employee to work at a different location.
A law professor who teaches at a school in New York but who lives in Connecticut was forced to teach his classes remotely and was not permitted to teach in New York during the pandemic. This professor is challenging New York’s convenience of the employer rule. Unfortunately, it will take a few years for this case to wind its way through the court system.
In the meantime, employers and employees must deal with ongoing
withholding uncertainty. This uncertainty is compounded by the fact that many states impose rather low thresholds to require withholding.
For instance, Maryland, New Jersey, Ohio, and Pennsylvania, among others, require withholding if an employee works one day in the state. Other states have relatively low thresholds of 12 days (Maine) or 15 days (Connecticut).
Still, others impose the withholding obligation once a dollar threshold is crossed. For example, South Carolina requires withholding once an employee has earned $1,000 in a calendar year and Wisconsin has a $1,500 wage threshold.
While it is important for an employer to withhold properly, employees working remotely can raise additional tax issues. For instance, does the employee’s presence in the remote work jurisdiction subject the employer to entity-level taxes in that jurisdiction where the employer had not previously been subject?
This issue may be compounded if both the state and local jurisdiction from which the employee is working impose entity-level tax. Similarly, does the employee’s presence in the remote work jurisdiction subject the employer to the obligation to collect sales and use tax where it had not been subject to such obligation?
A best practice.
Employers want to attract the best employees must navigate this labyrinth of legal and tax compliance burdens. best practice to identify and compile the various state/local employment and tax law rules and then quantify the potential financial and administrative costs.
Once this has been done, an employer should evaluate whether attracting the best and brightest – regardless of location – outweighs the additional tax, administrative cost, and risk of tax assessment (including interest and penalties) for failing to properly comply.
Finally, an employer should craft and communicate a policy (including employee certification of work location, change) so that all employees are treated fairly and relevant employment laws are properly followed.
Clearer rules could help.
In the end, it would certainly be simpler and clearer if state taxing authorities were to adopt uniform rules. However, our federalist form of government allows each state to choose its own path unless Congress mandates uniformity in this area.
Though, the variety of states’ competing interests a “remote” possibility, so employers are left with uncertainty .
Michael Semes is Counsel with BakerHostetler in Philadelphia and part of the firm’s state and local tax group. He is also Professor of Practice at the Villanova University Charles Widger School of Law in the Graduate Tax Program.
Amy Traub is Chair of BakerHostetler’s national Labor and Employment Group and is in the firm’s New York office. She is an experienced employment litigator and adviser, focusing her practice on the management side of employment law matters for clients in all industries, with a focus on the health care, hospitality, and retail industries.
This article originally appeared in the April 27, 2022 edition of Payroll Update, available on Checkpoint.
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