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Remote working state tax complications

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Young woman university student For employers dealing almost a year with employee workplace adjustments during COVID-19, their tax accountants may have more questions than answers when doing this season’s taxes.

Liability concerns arising from the need to prevent office transmission of COVID-19 led to a widespread decision to relocate employees to their homes to work, enabled by the fact that internet access is now commonplace in residences. However, since it is common, especially in large American cities, to draw employees who live in different states than the office’s location, the definition of where an employee’s “workplace” actually is has shifted dramatically.

In reaction, many state and local laws governing how employment taxes are collected have been enacted to address these “actual workplace” changes. Tax compliance obligations to state and local authorities have necessarily been complicated by these changes, and employers must take stock and understand these thoroughly.

One important consideration for employers is determining whether bordering states have reciprocal agreements. These would ensure that employees who live in their respective states are not subject to tax in other states in which they do their work. The agreements typically specify that employers should withhold income taxes on a nonresident employee’s wages only for the employee's resident state and that such employees' wages are not subject to income tax rules of the state where wages were earned (i.e., where the service was performed).

Hovering over this is the New Hampshire v. Massachusetts lawsuit before the Supreme Court, where two states are battling over Massachusetts’ “actual workplace” legislation. New Hampshire is contesting a Massachusetts’ emergency regulation stating that compensation received by a nonresident who previously worked in Massachusetts but is working outside that state due to COVID-19 restrictions must still recognize that compensation as subject to Massachusetts income tax. New Hampshire contests this as an unconstitutional imposition of an income tax on New Hampshire residents. Any decision likely will have far-reaching impacts outside of these two states.

Remote working considerations have upended how payroll taxes are determined. To learn more about these laws and agreements and how they are impacting your tax obligations, see Grant Thornton’s webcast “Planning for a continued remote workforce.” Our tax advisers explore the numerous state and local tax law changes your business must understand. To learn more, sign up here for a replay of this webcast.