Coronavirus State Tax Withholding Guidance for Telecommuting Employees

08 May 2020 Coronavirus Resource Center: Back to Business Blog
Authors: Lynn A. Gandhi

State tax agencies are addressing the withholding questions raised due to employees who are telecommuting from home in states other than the employer’s work location.  Employees may also be telecommuting in states other than the employer’s work location due to travel restrictions or relocations due to health and safety precautions.  This has raised questions regarding employer state withholding obligations, state qualifications and the potential for employer business taxes, as well as the applicable states’ unemployment insurance.  Here are the top FAQ’s clients are asking:

Does my business need to register and qualify to withhold taxes for employees telecommuting in states in which we are not currently set up to withhold?  Should we terminate employees to avoid registrations?  

Many states have issued guidance in the form of notices or FAQ’s instructing employers to follow their normal withholding reporting and that the temporary telecommuting due to COVID-19 will be excused. 

Employers are advised to communicate that withholding will continue in pre-COVID-19 fashion to their employees; it is the employee that may be liable under state law for the payment of individual income tax on wages earned while working in the state.  To determine if estimated tax payments should be remitted to the state of temporary relocation, employees should be urged to consult their individual tax advisors.  

State tax credits may be available for taxes paid to another state.  In addition, relief may be available for penalties associated with the underpayment of taxes.  Many states are unable to waive interest, which is mandated by statute.

Will the presence of employees telecommuting subject our business to other business tax filings?

Some states have specifically addressed the issue of nexus and indicate that they will waive the nexus standard for subjecting companies to business taxes as long as the only physical presence in the state is due to employees working from home due to COVID-19.

How long a waiver will stay in place as states begin to reopen has not been addressed; businesses should consider the impact of additional state tax filings if work from home is embraced by their organization subsequent to statewide permission to return to work.

Will the presence of employee telecommuting subject our business to sales tax collection?

Many states have acknowledged that if a business is below the remote-seller thresholds, the state will not consider the business to have nexus for purposes of sales tax collection due to the presence of telecommuting employees during mandated stay-at-home time periods.  

In summary, it is important for businesses to take additional steps now in order to mitigate their risk of negative impacts from the coronavirus. For more information about recommended steps, please contact your Foley relationship partner or the author listed below.

Foley has created a multi-disciplinary and multi-jurisdictional team, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries. Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form. 

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