Tax challenges expected from widespread remote work


With vaccines widely available and the lifting of state and local government restrictions, the summer of 2021 signals the beginning of a return to normal life for many. However, as some workers gradually return to the office, things may look very different than they did when they were forced into a remote work environment in March 2020. Hybrid or even full remote work arrangements will become commonplace in many industries, with employers changing their policies to facilitate these arrangements. From a state and local tax perspective, the ubiquity of remote work will cause new challenges for both employers and employees as taxing authorities rescind temporary income tax withholding and nexus policies and continue to take different approaches to the tax treatment of remote work arrangements.






For much of the COVID-19 pandemic to date, many employees have been required to work remotely instead of at their traditional work location due to the state and local emergency declarations and stay-at-home orders mandating office closures. Tax withholding complications quickly arose for employees whose new work arrangements were located in states different than where they would normally perform their work.1 In the absence of a reciprocal income tax agreement between certain states, an employer is typically required to withhold tax in the state where the employee works, with many states imposing a tax withholding obligation once the employee has worked in the state for a certain number of days. For employees who had traditionally crossed state lines to go to work, but then had to work remotely from a different state, employers could have been required to withhold state personal income tax based on the employee’s work location instead of the employer’s location, in some cases possibly requiring payroll tax registration in additional states.

In response to a drastic shift to widespread remote work in a short period of time, many states and localities issued temporary emergency guidance in the spring of 2020 addressing the income tax withholding treatment of employees working from a different state due to the pandemic. The majority of states that issued such guidance indicated that income tax withholding requirements would not change during the time that applicable state of emergency declarations were in effect, or through a specific end date. In other words, wages paid to nonresident employees working in one state before the pandemic were considered income earned and subject to tax withholding in that state.

Many states also agreed to suspend business tax nexus thresholds in recognition of employees working remotely in a state in which a company would not otherwise have an income or sales and use tax filing obligation. Such states also announced that an out-of-state company would not lose the protections of Public Law 86-272 (P.L. 86-272) if the company’s only presence in a state was due to an employee teleworking in the state due to the pandemic. Additionally, many states did not consider temporary changes to an employee’s physical work location to alter the apportionment of income during the periods in which temporary telework requirements were in place, or through a specific end date. However, such temporary guidance is quickly coming to an end in the applicable states.




State income tax withholding developments and litigation


Over the past several months, states have reacted in different ways with respect to the income tax withholding treatment of remote workers. While some states have explicitly announced the end of temporary guidance in conjunction with the lifting of state and local public health restrictions, others have enacted permanent changes to their income tax withholding rules as a result of the pandemic and in recognition of an increasingly remote workforce. Still others have implemented more controversial policies in the wake of the pandemic, inviting lawsuits from state residents and even from other states as they are attempting to deal with the longer-term effects of the taxation of remote work.



Ending of “status-quo” income tax sourcing guidance


As expected, states including Maine and Pennsylvania ended their “status-quo” income tax sourcing policies that required nonresidents working for in-state employers to continue to source such income to that state.2 Such temporary guidance also allowed state residents who worked remotely to continue sourcing income to the state of their employer. Effective July 1, 2021, Pennsylvania residents required to work remotely in Pennsylvania for out-of-state employers are required to source wages to Pennsylvania and will not receive a resident tax credit even if their employer’s home state taxes such compensation.3 Other states, such as South Carolina, that were set to end their pandemic-era policies acted to extend their temporary income tax withholding rules through a later date given uncertain conditions.4 Still other states, such as New Jersey, have tied the end of their temporary guidance to the lifting of public health or state of emergency declarations, some of which still remain in effect.5 Finally, instead of extending its temporary administrative guidance, Kansas enacted legislation giving employers the option to withhold income taxes based on the employee’s primary work location and not based on where the employee is working during the pandemic, for wages paid to teleworking employees through December 31, 2022.6 Such divergent policies are indicative of how differently states intend to treat the income earned by remote workers.



Aggressive state approaches and litigation


Massachusetts took a particularly aggressive position during the pandemic by adopting a temporary regulation that allowed the state to tax the income of nonresident employees who worked in the state prior to the pandemic, but who were teleworking during the pandemic.7 The regulation provided that compensation received for services performed by a teleworking nonresident would continue to be treated as Massachusetts source income for a temporary period ending 90 days after the end of the state’s COVID-19 emergency declaration.8 In response, the border state of New Hampshire, which does not impose a personal income tax, brought a lawsuit directly filed in the U.S. Supreme Court. The lawsuit alleged that the Massachusetts regulation unconstitutionally imposed income tax on New Hampshire residents who lacked a connection with the taxing state during the pandemic, in violation of the Commerce and Due Process Clauses.<9 After requesting a briefing from the acting U.S. Solicitor General on the matter, the Court declined to hear the case as a matter of original jurisdiction.10

The New Hampshire v. Massachusetts litigation has highlighted some of the more aggressive state efforts to tax the income of employees working beyond their borders during the pandemic and beyond. In particular, states and localities following a “convenience of the employer” rule (including New York, Arkansas (pre-2021), Connecticut, Delaware, Nebraska, Pennsylvania, the city of Philadelphia and certain Ohio municipalities) source employees’ income to their state or locality if the employees work remotely for their own convenience rather than as a requirement of their employer that is located in the taxing state. New York historically has interpreted this rule most aggressively, taking the position that for nonresidents with a primary office located in New York, days spent teleworking during the pandemic are considered days worked in the state unless the employer established a bona fide employer office at the teleworking location.11 In an effort to enforce this policy, the New York Department of Taxation and Finance has begun auditing the 2020 income tax returns filed by nonresidents with New York-based employers, but who may have worked elsewhere during the pandemic.12 New York’s policy has drawn the ire of New Jersey and other bordering states, whose residents historically commuted to New York and paid a significant amount of income tax to the state.13 During 2020, however, these employees were forced to work remotely in their resident state or elsewhere because their New York offices were closed.

On the local income tax level, Ohio has been at the center of attention over its controversial municipal income tax sourcing law enacted in March 2020.14 For municipal income tax withholding purposes, the law included a temporary provision that sourced compensation of teleworking employees to the employee’s principal place of work rather than the remote work location during the period of Ohio’s COVID-19 state of emergency and for 30 days after that period concludes. In response, a nonprofit organization, several Ohio residents, and even a Pennsylvania resident filed multiple lawsuits against several Ohio cities – including Columbus, Cleveland, and Toledo – in state court, alleging that the cities’ taxation of employees working outside city borders violated the U.S. and/or Ohio constitutions due to a lack of an actual connection between the city and the income being taxed.15

In one of the Ohio cases, the city of Columbus agreed to refund the municipal income taxes withheld by the plaintiff’s employer. In the other cases, however, the trial courts have ruled in favor of the Ohio cities, holding that the temporary law did not violate the plaintiffs’ due process rights, finding that recent Ohio Supreme Court decisions on interstate taxation did not address Ohio’s power to tax residents within the state’s borders.16 In partial response to this litigation, Ohio’s budget legislation included a provision partially reversing the state’s 2020 municipal income sourcing law, providing that for the 2021 tax year, employee withholding should mirror the location where the work is being completed.17 As such, the law allows remote workers to claim refunds of income tax paid to cities on days where they worked elsewhere during 2021, but the withholding relief does not apply to the 2020 tax year.



Other changes to state income tax withholding rules


During the first half of 2021, several states enacted legislation making temporary or permanent changes to their income tax withholding policies. In response to New York’s aggressive application of its convenience rule and Massachusetts’ pandemic-contingent income sourcing regulation, Connecticut enacted emergency legislation allowing residents to obtain a credit for income tax paid to another state applying a “convenience rule,” effective for the 2020 tax year only.18 Additionally, the emergency legislation provides a credit to residents who paid income tax to another state due under a law or rule requiring them to do so if they were working in that state prior to March 11, 2020. The legislation was intended to address the risk of Connecticut residents being subject to double taxation on income earned while working remotely in the state during the pandemic.

Other states enacted permanent changes clarifying when nonresidents would be subject to an income tax withholding requirement in their state and even providing incentives for employees to work remotely in their state. For example, Arkansas recently enacted legislation providing that a nonresident employee must be physically located in the state when working in order to be subject to the state’s income tax.19 Effective January 1, 2021, the law reverses previous opinions issued by the Arkansas Department of Finance and Administration that adopted a form of the “convenience” rule by requiring that nonresident income is allocated to Arkansas based on work that is physically performed in the state.20 Previous versions of the legislation would have provided a 30-day threshold against income tax withholding for such nonresidents, but this provision was later removed.

Finally, in an effort to attract remote workers, Louisiana enacted legislation that will provide a partial income tax exemption for teleworkers who move to the state, but work for an out-of-state employer.21 Beginning with the 2022 tax year, the law will offer a 50% income tax exemption to so-called “digital nomads,” or individuals who establish domicile in Louisiana after December 1, 2021 and work for a nonresident business or who are self-employed.22 Capped at $150,000 on an annual basis, the exemption is available to remote workers for up to two years through 2025.23




Business tax nexus and apportionment developments


Similar to temporary state income tax withholding guidance, states are beginning to lift temporary business tax nexus relief according to a specific end date or tied to the ending of state of emergency declarations. For example, Pennsylvania’s temporary nexus rules ended on June 30, 2021, after which existing tax law applies.24 Under traditional corporate net income tax nexus rules, an out-of-state business employing a Pennsylvania resident working remotely after June 30 “has nexus for 2021 and future years based solely on the activities of that employee” unless the worker’s activities are protected by P.L. 86-272.25 For sales tax purposes, a company that continues to have a Pennsylvania resident working remotely after June 30 may now have nexus for the entire 2021 tax year and future years based solely on that employee’s activities.26

Maine likewise ended its temporary business tax nexus relief on June 30, while South Carolina announced an extended end date of September 30.27 Meanwhile, other states tied the ending of their business tax relief to the lifting of state emergency declarations. For example, Indiana’s temporary nexus waiver expired on June 30 in accordance with the rescinding of state directives on the same date, while Massachusetts’ nexus relief is scheduled to end on September 13, or 90 days after the state of emergency was lifted on June 15.28 After these dates are reached, remote workers will trigger nexus for income and/or sales tax purposes in these states.






The prolonged length of the pandemic has caused employees to settle into remote work arrangements that allowed many to perform their tasks more efficiently while providing extra flexibility in maintaining personal schedules. At the same time, companies that have successfully managed through a teleworking environment may view increased remote work as an opportunity to reduce their office footprint and related operating expenses in order to make investments elsewhere. As a result, remote work will likely become a regular part of business hiring and operating models for many companies going forward. That being the case, employers face a wide range of often conflicting state and local tax policies to navigate as they consider revising their policies around remote work.

Employers should closely monitor state and local guidance issued on the tax treatment of remote working in order to understand when and if such guidance expires in conjunction with the lifting of emergency declarations and the re-opening of the economy. Understanding the interplay of these rules will be critical for purposes of adjusting payroll tax reporting and business tax filing policies and processes. Expiring temporary legislation and/or administrative guidance throughout 2021 may largely impact companies with employees working in locations different from their traditional work location prior to the pandemic, both from an income tax withholding and business tax nexus perspective.

To that end, employers may need to consider investing additional resources in systems and processes to track employee locations for payroll tax withholding and business tax nexus and apportionment purposes, since the state where an employee is working may no longer be consistent with that employee’s primary location. Being able to obtain such information in a reasonably efficient manner could increase the probability that employers will be able to make sound and accurate business and tax decisions related to the new remote working environment. In combination with accurately tracking employee work locations, employers should also carefully be thinking about revising internal policies that set parameters for remote work in order to minimize additional payroll tax reporting and business tax filing obligations. Some important questions to consider include whether employees will be permitted to move to any state to work remotely, and whether they are free to work from any location. These questions should be considered in the context of the company’s nexus footprint, the number of states in which the state is currently registered for payroll and business tax reporting purposes, and the makeup of the company’s tax reporting function.

For those companies operating in “convenience of the employer” states and localities, the specific wording of policies on remote work will become incredibly important. In the midst of lockdowns that often mandated the closure of offices and other worksites, there was no question that employees were required to work from home during this period. However, the continued lifting of state and local restrictions is likely to cause increased confusion as to whether employees are in fact required to work from home rather than for their own convenience. As businesses continue to re-open their offices, they should be careful to understand the implications of making the office available to employees, even on a part-time basis. For example, a policy that outlines default work locations and the specific days in the office in which certain personnel are required to report to the office, along with variances for personnel based on the department or division to which they are assigned, may raise questions as to whether the convenience rule is always, sometimes or never met. The communication of clearly delineated policies to employees, along with an explanation on how such policies may impact tax withholding, may be critical in actually determining the state and local income tax consequences of an employee’s work location, and ensuring that employees will not be surprised by withheld amounts that may suddenly appear on their Form W-2 statements.

In addition to payroll and business tax filing obligations, employers should also be evaluating the impact of increased remote work on business tax liabilities due to the potential of changing income tax apportionment factors. With the lifting of temporary guidance that had left income tax apportionment undisturbed during the pandemic, remote employees working in different states may have important implications for the apportionment of taxable income due to changing receipts and payroll factors. Shifting employee locations may significantly impact service businesses operating in states following a cost of performance souring methodology with respect to the sourcing of service revenue, especially if significant labor costs are involved. At the same time, shifting customer locations will potentially impact the sourcing of receipts from tangible goods or services for those states following a market-based sourcing approach. And for those states that continue to utilize a payroll factor for apportioning income, employers will need to make payroll sourcing decisions based on either the employee’s traditional base of operations or the location where the work is performed. Such apportionment considerations, coupled with new business tax filing obligations, may have important financial reporting implications for companies that are moving toward more flexible remote work arrangements.

While the pandemic may be waning, the proliferation of remote work will only continue. As states and localities provided temporary tax policies addressing remote work through the worst of the public health crisis, businesses will need to think carefully about how the end of these policies will impact their payroll tax reporting and business tax filing obligations going forward. Considering the disparity in state taxing approaches to remote work, employers should plan to develop specific policies and procedures around teleworking in order to minimize additional state and local tax liabilities looking ahead.


1 For an earlier discussion of state income tax withholding policies, nexus waivers and other guidance issued during the pandemic, see GT SALT Alert: COVID-19 impact on remote work and state tax policy.
2 Maine Tax Alert No. 14, COVID-19 Tax Provisions to Expire, Maine Revenue Services, June 2021; Telework Guidance, Pennsylvania Department of Revenue, updated June 17, 2021, published at
Telework Guidance, Pennsylvania Department of Revenue, updated June 17, 2021.
SC Information Letter #21-8, South Carolina Department of Revenue, Apr. 7, 2021 (extending temporary income tax withholding rules through September 30, 2021).
COVID-19 Information, New Jersey Division of Taxation, updated June 29, 2021, published at
6 Kan. S.B. 47, § 9, Laws 2021.
7 MASS. REGS. CODE tit. 830, § 62.5A.3.
8 MASS. REGS. CODE tit. 830, § 62.5A.3(1)(d). The Massachusetts Governor announced that Massachusetts’ COVID-19 state of emergency ended on June 15, 2021, meaning that the temporary regulation is scheduled to end on September 13, 2021. COVID-19 Order No. 69, Office of Governor Charlie Baker, May 28, 2021.
New Hampshire v. Massachusetts, U.S. Supreme Court, No. 22O154, filed Oct. 19, 2020.
10 Motion for leave to file bill of complaint denied, June 28, 2021.
11 Frequently Asked Questions about Filing Requirements, Residency and Telecommuting for New York State Personal Income Tax, New York Department of Taxation & Finance, updated Oct. 19, 2020.
12 Jimmy Vielkind, New York Tax Officials Crack Down on Remote Workers, WALL STREET JOURNAL, May 6, 2021.
13 In 2018, approximately 434,000 New Jersey residents paid $3.7 billion in New York income taxes, while nearly 87,000 Connecticut residents paid $1.3 billion in New York income taxes, accounting for approximately 10% of New York income tax revenue for that year. Id. Since New York does not engage in reciprocity agreements with any states, residents living outside New York pay tax to New York and claim a credit for such tax offsetting their resident tax paid, reducing resident tax collection related to work performed in such resident state.
14 Ohio H.B. 197, § 29, Laws 2020. It should be noted that while most of the litigation addressing localities since the beginning of the pandemic has been focused on Ohio, there is relatively little guidance on this subject in many other localities, particularly in Pennsylvania, which has nearly 3,000 local earned income taxes imposed by the state’s municipalities.
15 See The Buckeye Institute v. Kilgore, No. 20CV-4301, Franklin County Court of Common Pleas, filed July 2, 2020; Denison v. Kilgore, No. 21CV-00848, Franklin County Court of Common Pleas, filed Feb. 2021; Schaad v. Alder, Hamilton County Court of Common Pleas, filed Feb. 2021; Curico v. Hufford, Lucas County Court of Common Pleas, filed Mar. 11, 2021; Morsy v. Dumas, Cuyahoga County Court of Common Pleas, filed Apr. 8, 2021.
16 In Hillenmeyer v. Cleveland Board of Review, the Ohio Supreme Court held that Cleveland’s nonresident tax on a professional athlete who was not actually present in the city violated the local tax ordinance and that the city’s method for calculating income taxes on nonresident professional athletes was unconstitutional. 37 N.E.3d 1248 (Ohio 2015). In Willacy v. Cleveland Board of Tax Review, the state supreme court ruled that Cleveland properly taxed a nonresident’s income from stock options exercised in 2014 and 2015 (and later 2016) after the taxpayer retired and moved out of state. 151 N.E.3d 561 (Ohio 2020); Slip. Op. No. 2021-Ohio-1734, Ohio Supreme Court, May 25, 2021. For further discussion of the Willacy case, see GT SALT Alert: Ohio upholds municipal tax of stock options.
17 Ohio H.B. 110, Laws 2021.
18 Conn. Public Act. No. 21-3 (H.B. 6516), Laws 2021. For further discussion of the Connecticut emergency legislation, see GT SALT Alert: Connecticut legislative fix averts double taxation.
19 Ark. Act 1019 (S.B. 484), Laws 2021.
20 Ark. S.B. 484, § 2, amending ARK. CODE ANN. § 26-51-202(c).
21 La. S.B. 31, Laws 2021.
22 La. S.B. 31, § 1, adding LA. REV. STAT. § 47:297.16.B.
23 La. S.B. 31, § 1, adding LA. REV. STAT. § 47:297.16.B.1, I.
24 Telework Guidance, Pennsylvania Department of Revenue, updated June 17, 2021.
25 Id.
26 Id.
27 Maine Tax Alert No. 14, COVID-19 Tax Provisions to Expire, Maine Revenue Services, June 2021; SC Information Letter #21-8, South Carolina Department of Revenue, Apr. 7, 2021.
28 Coronavirus Information: DOR’s Back on Track Plan, Indiana Department of Revenue, June 2021, published at; Mass. TIR 20-15, Revised Guidance on the Massachusetts Tax Implications of an Employee Working Remotely due to the COVID-19 Pandemic, Massachusetts Department of Revenue, Dec. 8, 2020.


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