With the continuation of COVID restrictions, employers should consider certain actions regarding employee withholding. Most states only impose tax on employees for services that are physically performed in the state. If a resident performs services in another state, a credit will generally be provided by the home state for taxes to the state in which the services were performed.
As the COVID restrictions continue, your employees may consider submitting a revised W-4 to designate the state in which withholding should occur. If the employee is located in a state in which the business does not have a fixed employment location, the employee should be advised to make estimated payments. If your employees have not considered the impact of Work From Home, they may have overpaid to the state in which they normally reported for work, and will need to request a refund of taxes withheld. They may also be underpaid to the state in which they have been performing such activities.
While many states have issued guidance that the existence of remote work employees due to the COVID pandemic will not create nexus for the employer, such guidance has not been consistent, and in many cases, is not legally binding. Nor should employers have comfort in the guidance issued by certain states to the contrary. Businesses should be wary of continuing to withhold and remit employee income taxes to jurisdictions which they know the employee is not currently located. There are several legal challenges underway regarding this issue.
In addition, state unemployment insurance rules (which is generally an employer cost, with no contribution by the employee), do not necessarily follow withholding requirements. It can be costly and administratively burdensome to change employee work location regarding state unemployment insurance.
In summary, it is important for businesses to take additional steps now in order to mitigate their risk of 2021 negative impacts due to continued Work From Home requirements. For more information about recommended steps, please contact your Foley relationship partner or the author listed below.
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