State tax impact for telecommuting employees


Across the country, the spread of COVID-19 is having a dramatic effect on the way employers conduct their businesses, and how employees are finding ways to perform their tasks remotely. Due to safety concerns and mandated requirements, along with technological capability, many employers are now requiring employees to work from home rather than commute to the office where they typically provide services. While working from home is a practical solution that allows companies to continue their operations without complete disruption, state tax and other consequences should also be considered.




State income tax withholding


As a general rule, state income tax withholding is required in the state in which the employee’s services are performed, not the state in which the employee resides. Exceptions apply if the specific state does not impose an income tax or a reciprocal agreement exists between the state where the employee works (i.e., where the service is performed) and where the employee resides. Reciprocal agreements are relatively common in bordering states in the Mid-Atlantic and the Midwest, so that residents in one state do not have to file income tax returns or pay income tax on wages earned in the nonresident state. In addition, a few jurisdictions, including New York, impose a “convenience of the employer” rule under which a non-resident employee is subject to New York personal income tax on income earned when the employee is working from the non-resident location at the employee’s convenience, rather than as a requirement of the employer.1 This can result in situations in which the employee is subject to withholding from both the resident and non-resident jurisdictions.2

Since COVID-19 is causing more employees to work from home instead of in the office, this often results in employees working in states or localities that are different than the employer’s office. This is especially true in the Northeast, where several large municipalities including Washington, D.C., Philadelphia, New York City, and Boston are located in close proximity to the borders of other states. This could result in a change in the jurisdiction where the employer would be required to withhold on those wages. Employers that are not registered in an employee’s home location may need to register for payroll taxes in new states where they are not already registered and withhold taxes accordingly. In addition to state income taxes, employers may also be required to withhold local income taxes as applicable.

In some cases, defining the work arrangement when an employee works offsite may make a significant difference as to the amount of tax the employer ultimately has to withhold on the employee. For example, the city of Philadelphia imposes a wage tax on all resident and non-resident individuals working in the city.3 To the extent a Philadelphia non-resident works at an employer in the city, the non-resident must pay the wage tax if the employee works at the office, or the employer allows the non-resident to work from home for the sake of convenience.4 However, if the non-resident is required by the employer to work from home, then the employee is exempt from the city’s wage tax for the days in which such requirement is in place.5

This results in an interesting issue for employees of Philadelphia companies in light of COVID-19. Since COVID-19 forced many businesses within the city to effectively shut down their physical offices,6 all non-resident employees able to work from home in this situation are required by the employer to do so. Since these employees are compelled to work from home, to the extent they are Philadelphia non-residents, they should be exempt from the city’s wage tax until Philadelphia affords their employers the right to reopen their Philadelphia offices. This temporary exemption should be effective regardless of whether a non-resident employee was working from home at the convenience of the employer, or at the direction of the employer, prior to COVID-19.

Likewise, the advent of COVID-19 raises similar issues in New York and other jurisdictions that impose the “convenience of the employer” rule. Given the impossibility of employees that are working from their non-New York residences from physically accessing their New York offices, it would stand to reason that the “convenience of the employer” rule cannot currently be administered to subject any non-resident to New York withholding.




Additional state tax considerations


In addition to state and local income tax withholding requirements, employers should consider potential implications with respect to their own business taxes. To the extent employees telecommute from states in which a corporate employer does not have an office, such physical presence may result in corporation income tax obligations in those new states. For example, in Telebright,7 a full-time employee telecommuted from her New Jersey residence. The employer, a Delaware corporation with operations in Maryland, did not have any dedicated property or payroll located in New Jersey except for the telecommuting employee. The employer withheld and remitted New Jersey gross income tax from the employee’s salary. Under these facts, the New Jersey Superior Court determined that the employer was subject to the New Jersey Corporation Business Tax (CBT) due to the employee’s presence in the state.

States have started to provide employers a temporary reprieve from corporation income tax obligations in situations where COVID-19 has forced a small portion of its employees to work from home in a state in which such employers would otherwise not have nexus. For example, the New Jersey Division of Taxation has announced that it will temporarily waive the legal threshold8 discussed in Telebright, which treats the presence of employees working from home in New Jersey as sufficient nexus for out-of-state corporations.9 In the case of employees working from home solely as a result of COVID-19 response measures, such presence will not meet the threshold to establish nexus for CBT purposes.10 This reprieve from nexus is likely supportable from a Due Process perspective as during this time, businesses by and large are not purposefully availing themselves of the non-resident employees’ markets.11

Beyond income tax, the corporate employer may be subject to new sales/use tax registration, collection and filing requirements as a result of the location of one telecommuting employee. Even prior to the Wayfair12 decision, a business may be subject to sales tax obligations based on the physical presence of just one employee. After Wayfair, remote sellers with a sufficient amount of sales or transactions to customers into a state could be subject to sales tax obligations without physical presence. But to the extent such sales thresholds are not reached, the physical presence rule is still relevant, with one employee’s temporary work in the state (even resulting from the unpredictable circumstances dictated by COVID-19) possibly considered as more than a de minimis physical presence for the employer.




Other non-tax issues


From a non-tax perspective, employers will have to consider changes to workers’ compensation policies and coverage, as well as labor law requirements, in novel states where employees are now working from home. Likewise, employers will need to take into account their data protection and confidentiality policies as information on employees’ laptops are no longer in secured office areas. Employers should also give thought to possible reimbursement policies covering employees’ costs for equipment and other expenses related to their home offices.






The state tax impact of telecommuting employees in the shadow of COVID-19 may appear at first blush to be a somewhat obscure topic, but as these employees receive paychecks and their employers begin to assess their overall tax positions for financial statements and eventually their tax returns, this topic should garner more attention.13 We are hopeful that more states (or even the federal government) provide leniency through published guidance with respect to certain fact patterns that may unintentionally arise due to COVID-19. Protecting employers from becoming subject to a new state tax regime in 2020 because of an employee’s home location is one of those fact patterns. Suspending the “convenience of the employer” rule in jurisdictions that have it, and instead allowing only the resident jurisdiction the ability to impose its personal income tax during the COVID-19 crisis would also appear to be a sensible approach. Regardless of whether such relief is provided, however, it is important that both employers and employees become more knowledgeable with respect to the consequences of telecommuting arrangements, in order to address these issues before they cannot be reversed.


1 The “convenience of the employer” test was affirmed by the New York Court of Appeals in Zelinsky v. Tax Appeals Tribunal of the State of New York, 801 N.E. 2d 840 (N.Y. 2003).
2 While these situations often can be remediated through the use of a credit for taxes paid, such credits are not consistent from state to state, and in some cases do not provide actual relief from double taxation.
3 PHILA. CODE § 19-1501 et seq.
4 “Wage Tax policy guidance for non-resident employees,” City of Philadelphia Department of Revenue, March 26, 2020, published at
5 Id.
6 “The new Business Activity and Stay at Home Order: What you need to know,” City of Philadelphia, March 22, 2020, published at
7 Telebright Corporation, Inc. v. Director, Division of Taxation, Superior Court of New Jersey, Appellate Division, 38 A.3d 604 (N.J. Super. 2012).
8 N.J. REV. STAT. § 54:10A-2; N.J. ADMIN. CODE § 18:7-1.9(a).
9 “Tele-Commuting and Corporate Nexus,” N.J. Division of Taxation, Mar. 30, 2020, published at
10 Id.
11 See Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which addressed the Due Process considerations of requiring a remote seller to register, collect and remit sales tax, prior to concluding that a physical presence rule was supportable from a Commerce Clause perspective.
12 South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
13 For a timely article also discussing the state tax issues involving telecommuting in detail, see Jared Walczak, “Working from Home Brings Greater Exposure to State Tax Codes,” The Tax Foundation, Mar 25, 2020, published at





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