Do teleworking and remote employees trigger income tax nexus
A few months ago, as an employer, you may not have given much thought to where your employees live. Perhaps your main concerns were over commute times and where to send their tax forms at the end of the year.
Now, amidst COVID-19, many employees are working from home using teleworking technologies. Not only is this forcing many businesses to adapt their business models on the fly, but it is also raising some important tax-related questions.
For example, if a business based in Northern Virginia now has employees teleworking from their home located in Maryland, West Virginia, and the District of Columbia because of COVID-10, what are the business tax and accounting implications?
Does your business now have a business connection with these states? Let’s look at the impact that your employees working from home can have on your business.
WHAT IS TAX NEXUS?
Nexus means that your company has established a business connection in that state, and if nexus is established, your business may now be eligible to be taxed in that state. The criteria are typically based on whether or not your business has a substantial presence in that jurisdiction.
Recent legislation has removed the physical presence as a requirement for nexus, though it is still looked to first when considering nexus.
It is important to note that nexus is defined separately for both income tax purposes and sales tax purposes. They are slightly different when it comes to defining nexus as it relates to teleworking and remote employees.
For income tax purposes, nexus is established if an employee’s activity goes beyond mere sales activity in the state. For employees working exclusively from home, this standard is likely to have been met.
For sales tax purposes, merely having employees in the state may be enough to establish nexus. Recent legislation in South Dakota v. Wayfair helped to clarify some of these provisions.
Having employees in a state, even temporarily, can be enough to trigger nexus in that state.
HOW MIGHT YOUR COMPANY HAVE ESTABLISHED NEXUS WITH NEW STATES?³
Before the COVID-19 pandemic, some of your employees may have commuted from a neighboring state each day to get to the office.
If stay-at-home orders have forced you and your employees to work from home, they may now be temporarily working full-time in that neighboring state.
According to the legislation of many states, you have now established nexus for income tax purposes in that state and may have additional tax obligations and filing requirements.
This could change how your employees’ compensation is classified for income tax purposes. In addition, this could affect how revenues are categorized and taxed for your business.
Where an employee may have previously been taxed as if the income was earned in the state where your business is headquartered, they may now be taxed as if the income is earned in their home state. Applying the nexus rules could have a significant impact for payroll tax withholding purposes.
This could also have an effect on your company’s filings, such as corporate business tax filings.
Each state has its specific provisions for handling state tax nexus for teleworking and remote employees, so it is important to review your state’s regulations for further guidance.⁴
ARE THERE EXCEPTIONS TO THE NEXUS RULES?²
Some states and jurisdictions have taken the time to issue legislation related to the COVID-19 pandemic and how it affects the establishment of nexus for employees who are working from their homes.
As of the time of this writing, Indiana, Mississippi, New Jersey, Pennsylvania, and the District of Columbia have all issued legislation related to working from home due to the coronavirus crisis.
These states have determined that employees who have been required to work from home as a result of the COVID-19 pandemic will not trigger corporate tax nexus in their home state for that company.
This means that at least temporarily, companies and employees with connection to these states can continue with “business as usual”. It remains to be seen what guidance will be released by other jurisdictions at this time.
For residents of Washington D.C., who typically work in surrounding states and are currently working from home, the nexus rules will not apply. Income earned while the employee is working from home will still be sourced to the state where the resident is typically employed.
Additionally, the employee working from home in Washington D.C. will not result in tax nexus for their employer.
No special rules have been made for Virginia, West Virginia, or Maryland at the time of this writing, however, the team at Lipsey and Associates actively monitors for any changes in legislation.
The current health crisis has temporarily changed the way that we work, live, and relate to one another a way few of us have experienced in our lifetimes.
In times like this, it is especially important to keep your business operating smoothly and in compliance with current legislation.
If you have any questions about how having teleworking and remote employees will affect you and your business, please feel free to reach out to us for more information.
For more information on whether your business is subject to tax nexus in various states, please contact Lipsey and Associates.