In fact, the majority of states take the position that a telecommuting employee creates sufficient nexus to subject an employer to the state's business taxes. Some of those secondary and other factors include: As you might imagine, it is not especially easy to meet a sufficient number of the required factors, although with careful planning and cooperation by the employer, it may be possible. Contents of this publication may not be reproduced without the express written consent of CBIZ. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. Connecticut does not tax non-resident employees of an in-state employer when the employee performs services entirely outside the state. Pre-COVID-19, many states regarded remote workers as a nexus for employers based in different states. See Del. May 6, 2021 11:23 am ET. In its frequently asked questions concerning filing requirements, residency and telecommuting for New York state personal income tax, the New York Department of Taxation and Finance (the "Department") states that the rules set forth in its 2006 guidance on telework (Technical Services Division Memorandum TSB-M-06(5)I) continues to apply when employees are working remotely from outside the . In a remote-working environment, that challenge has increased. 20, 132.18(a); N.Y. Dept. 18In the Matter of Zelinsky, No. In addition, on March 5, 2021, Connecticut Governor Ned Lamont signed legislation clarifying that telecommuters who are residents in Connecticut and assigned to work in New York would receive a credit on income taxed by both jurisdictions. of Tax., "COVID-19 Telework Guidance Updated 08/03/2021," available at www.state.nj.us. From Tax withholding, select Edit. The COVID-19 pandemic has forced many businesses to close physical offices and transition their workforce to a remote work format. Millions have moved out of the state where their company is based, often to be . The primary factor is met if a home office is near a facility that is required for doing the job that the employers office cannot provide. Working from an out-of-state home does not mean you can skip paying New York taxes. New York Department of Taxation and Finance TSB-M-125I, employer withholding threshold for employees expected to work 14 days or fewer in New York during the calendar year. When the COVID-19 pandemic hit and many employees were told to work from home, some of them decided that could mean working from their parents' home on the Florida coast or an Airbnb in the Colorado mountains. Massachusetts issued guidance stating that income earned by nonresidents who had worked in Massachusetts before the COVID-19 emergency declaration, but were now telecommuting from another state, would be treated as Massachusetts-source income subject to state taxes. EY helps clients create long-term value for all stakeholders. Remote Workers May Owe New York Income Tax, Even If They Haven't Set Foot In The State, https://www.cbiz.com/Portals/0/Images/Article Images/Remote_Workers_May_Owe_NY_Income_Tax_Hero_Image.jpg?ver=McT5p3s8JU1ljb0MVVmxDA%3d%3d, https://www.cbiz.com/Portals/0/Images/Article Images/Remote_Workers_May_Owe_NY_Income_Tax_Thumbnail.jpg?ver=Va2BhOYAvwFPePj_DGbTCw%3d%3d, https://www.cbiz.com/Portals/0/Images/V2-CFOOutsourcing-Guide-CBIZ-Slider.jpg?ver=2021-07-12-143004-203, href="https://www.cbiz.com/insights/cfos-guide-to-co-sourcing-outsourcing" target="_self", The CFO's Guide to Conquering the Talent Crunch, The employee regularly meets with clients at their home office, The employee is not given dedicated workspace at the employers office, Advertising, business cards or letterhead list the home office as one of the employers offices. Believes in driving change by thinking taxes. Devoted husband, father of four. The New Jersey Division of Taxation (Division) took the position that TeleBright was liable for the CBT because it was "doing business" in New Jersey by permitting the employee to work from her home within the state. Why? With many business leaders forecasting that remote work is here to stay, full remote work or hybrid telecommuting arrangements will likely be commonplace. Historically, New York has used the convenience of the employer test to determine when withholding tax needs to be collected for employees working remotely. If the employer required remote work sites, then where are the employees wages earned? Johns employer is a software company based in New York City. In 2018, the Supreme Court made clear that a state can tax a company (or person) without any physical presence in a state. NJ/PA agreement noted above). Employer Retention Credit. For instance, Philadelphia took the position that if employees living outside the city were required to work from home by the employer because of the pandemic, those individuals were not subject to the city's wage tax. This informational form gives you all the details you need to complete a 1099 and also lets you know if your contractor is exempt from receiving a 1099. EY Americas Financial Services Office Indirect Tax, State and Local Tax Leader. As of 2022, 16 statesArizona, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsinand the District of Columbia have reciprocal tax agreements in place. 830, 62.5A.3. Social Security: In 2021, a flat rate of 6.2 percent will apply to wages up to $142,800. Further, more than 7 out of 10 of the remote workers were unaware that telecommuting from a . Go to the State withholding section. Medicare: 1.45% flat tax, plus an additional 0.9 percent for employees earning more than $200,000, and a flat rate of 2.9 percent for self-employed people. Thursday, June 10, 2021. New York City follows NY State guidance. Secondary factors are the following: (1) the home office is a condition of employment, (2) the employer has a bona fide purpose for the home office location, (3) the employee performs core duties from the home office, (4) the employee meets or deals with clients regularly at the home office, (5) the employer does not provide the employee with a designated office space at its regular places of business and (6) the employer provides reimbursement of substantially all expenses for the home office. Arkansas recently enacted legislation reversing the state's "convenience" rule, retroactive to Jan. 1, 2021 (Ark. Working from home has become the new norm for many workers. There have been recent attempts to limit the federal law, most notably the Multistate Tax Commission's guidance, which seeks to address how the law should (or should not) apply in the modern world.5 However, the federal law is still valid, and some companies continue to claim its protection. ACA reporting compliance is important for employer tax filing. Employers are responsible for withholding federal income taxes, FICA taxes (Social Security and Medicare), and federal unemployment taxes (FUTA) for remote employees. New York imposes a tax on non-residents for income "derived from sources in" New York, including income from a "business, trade, profession or occupation carried on" in the state. Apportionment drives the calculation of state taxable income or the taxable portion of a state's franchise tax base. Generally speaking, a remote employee will create nexus for the employer for tax purposes and as Telebright illustrates such connection will likely withstand constitutional scrutiny. Code. What should tax departments and tax professionals do? This is particularly true for employees who work in New York but live in another state during the pandemic. Rejecting these arguments, the court reasoned that the telecommuting employee was working full time in New Jersey creating a portion of the taxpayer's product and, as such, the company benefited from all of the protections New Jersey law afforded the employee. Again, it is important to note that in order to apply this, the employer must have reliable data on the remote work location and wages. Enabled by data and technology, our services and solutions provide trust through assurance and help clients transform, grow and operate. Div. However, an argument arose as to whether New Hampshire had standing to bring the suit. & Fin., Technical Memorandum No. Employers may be required to report taxable employee benefits, such as bonuses and stipends, for remote workers and withhold income taxes for the respective states. This solution also integrates with Workday, ServiceNow, and Cornerstone to streamline the onboarding and payroll process for remote employees. All rights reserved. One of the most sweeping economic changes arising as a result of the pandemic is the shift from in-person to remote working. Unlike DC, New York follows the "convenience of the employer" test, which provides that an employee with income from New York sources owes New York State taxes even if they are a non-resident, except for work days in which the employee is required by the employer to work out of state (e.g., not merely as a . Regs. Otherwise, if at least four of six Secondary factors are met, along with at least three out of the 10 Other factors, the office will be considered bona fide. Timothy Noonan: Sure, and those cases are 15 or 20 years old at this point. Divide the annual New York State tax withholding calculated in step 7 by the number of pay dates in the tax year to obtain the biweekly New York State tax withholding. New York City follows NY State guidance. A permanent remote worker will file their personal income taxes in their state of residence, whether they are a W-2 employee or a 1099-NEC independent contractor. emphasizes that employees regularly working in New York but working out of . Other factors are (1) the employer maintains a separate telephone line for the home office, (2) the home office address is listed on business letterhead, (3) the employee uses a specific area of the home exclusively for the business, (4) the employee keeps inventory of products or samples at the home office, (5) business records are stored at the home office, (6) the home office has a sign indicating that it is a place of business, (7) advertising for the employer lists the home office, (8) the home office is covered by business insurance, (9) the employee is entitled to home office expense deductions and (10) the employee is not an officer of the company. Turning to the constitutional issues, the court explained that the Due Process Clause is concerned with "fairness." 2. Now, the physical location of businesses has less relevance. Specifically, the New Jersey Division of Taxation (New Jersey Division) website states that, while New Jerseys "sourcing rules dictate that income is sourced based on where the services or employment is performed based on a days method of allocation," during the COVID-19 pandemic, "wage income will continue to be sourced as determined by the employer in accordance with the employers jurisdiction.". While the new law applies specifically to Connecticut nonresidents who telecommute to Connecticut from out of state, it may similarly apply to Connecticut residents who telecommute into a state that has a convenience rule, such as New York. 62.5A.3 (as most recently proposed Dec. 8, 2020). Statutory tax credits and negotiated incentives are often tied to the creation or retention of jobs within a designated geographic area (state, locality, enterprise zone, etc.). 2. New York, which has a significant influence on nonresident taxation, considers days telecommuted to be days worked in New York unless the employer has a bona fide location set up in the remote workers locality. "Governor Cuomo Issues Guidance on Essential Services Under The New York State on PAUSE Executive Order,", "New York Tax Treatment of Nonresidents and Part-Year Residents Application of the Convenience of the Employer Test to Telecommuters and Others,", "COVID-19 Related Tax Information: Telecommuting,", Commissioners Bulletin: Public Act 2021-3," Connecticut Department of Revenue Services website, New Hampshire v. Massachusetts, No. Bd. It also is a key driver of a taxpayer's effective tax rate for financial statement reporting of current and deferred taxes. It's crucial that businesses understand the potential state tax . Many states have issued specific guidance over the last several months addressing the income tax withholding treatment of remote employees. )Resident income tax withholding. Where remote work exposes the company to liability, such companies may need to consider creating "blacklist states" states where employees are prohibited from working remotely. For example, Illinois law states that nonresidents must pay taxes to Illinois if they work in the state for more than 30 days. If the employee lives and works in different states and those states do not have a reciprocal agreement, the employee will have to file two tax returns, one for each state. If you have questions about this recent New York State tax guidance, or other questions about tax law matters, please contact Jeffrey Marks at (212) 826-5536 or jmarks@fkks.com, or any other member of the Frankfurt Kurnit Tax Group. The State of New York closed nonessential businesses for much of 2020, beginning in mid-March 2020, due to the COVID-19 pandemic, leading to significant uncertainty around whether employees working from home due to government mandates would be taxed under the convenience rule. Georgia or New York. 220154, Supreme Court of the United States website. New York, which has a significant influence on nonresident taxation, considers days telecommuted to be days worked in New York unless the employer has a "bona fide" location set up in the remote worker's locality. Experian and the Experian trademarks used herein are trademarks or registered trademarks of Experian. This means that the New York Department is likely to allocate to New York the taxes attributable to most work-from-home days for employees who are assigned to work in New York but work remotely outside of the state due to the pandemic. Over the past two years, many employees have grown accustomed to remote work and the flexibility it provides. sourcing of New Jersey residents who telecommute. New York provides an exception from the convenience of the employer rule in limited circumstances. This site uses cookies to store information on your computer. Thus, Telebright is an important reminder of the position taxing authorities can take, as this column next delves deeper into the issues raised by a growing remote workforce. New York follows the so-called "convenience of the employer" test. No. Posted: September 21, 2021. See Form IT-2104.1, New York State, City of New York, and City of Yonkers Certificate of Nonresidence and Allocation of Withholding Tax. (2 minutes) New York state tax officials are scrutinizing refund claims filed by nonresident tax filers who normally commute to jobs in New York . New York: New York Senate bill S.8386 proposed that employees working outside the State (or City) during the pandemic (defined as the time period covered by New York Executive Order 202, March 7, 2020 to September 7, 2020) should be deemed to be doing so as a matter of necessity rather than for the employees' convenience and, thus, those . This column discusses items tax professionals should consider when evaluating the state and local tax ramifications of a remote work environment. Field Audit Guidelines. State income tax withholding. "Massachusetts Source Income of Non-Residents Telecommuting Due to the COVID-19 Pandemic," 830 Mass. solution for automating the tax withholding process, 4 Mistakes That Cause An Employer to Lose an Unemployment Hearing, IRS Receives More ERC Claims Than Estimated, How to Win Your Unemployment Appeal Hearing: Employers Guide, How to Ensure A Highly Secure Employment Verification Process, How Automations Make Income and Employment Verification Effortless. If the state of your residence has a reciprocal agreement with the state you . Conn. Gen. Stat 12-704(a) (similar to New Jersey, the credit is limited to the amount the proportion of the Connecticut residents non-Connecticut-sourced income "bears to such taxpayers Connecticut adjusted gross income." If an employee decides to work remotely in a state with a lower tax rate than the office state, this could be good news for the business. Generally The employers jurisdiction determines New Jersey Wage income. Similar employment tax, nexus, and apportionment issues exist. New York Department of Labor officials explained their views on cross-border work arrangements, noting that all New York laws apply immediately if employees work remotely in the state. Meeting the primary factor alone means the office can be considered a bona fide employer office.. Many people may not realize that you do not need to live in New York or be physically present there to be subject to New York income tax on your wage income. "In a number of states, a nonresident employee is subject to withholding on the first day of travel into the states. Copyright 2022, CBIZ, Inc. All rights reserved. City of Philadelphia Department of Revenue He appealed to the U.S. Supreme Court, which refused to grant certiorari.19. They are responsible for withholding state income tax and will be familiar with your situation. Servs., 2020 Form CT-1040,Connecticut Resident Income Tax Return Instructions, p. 27. Servs., 2020 Form CT-1040. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. Jurisdictions are shifting from temporary relief and guidance, driven by the pandemic, to enacting new legislative, regulatory, and administrative guidance to adapt to the expansion of more permanent remote-work arrangements.21 Tax professionals will find opportunities to be both proactive and reactive in addressing these evolving state and local tax issues.