Making Sense of Telecommuting and Non-resident State Taxes

Employers 09.22.2020 2 MIN READ

The COVID-19 pandemic has forced employers to rapidly adapt their workplace policies in order to ensure business continuity. Most have done so by increasing flexibility for their employees to work from home, but this change comes with important tax implications both employees and employers should be aware of.

Over the last several months, many employees have been working from home in a different state from where their employer is normally located. The resulting nonresident state tax implications are a major topic of interest and confusion for employers, who must determine the proper state tax withholding. Ayco’s Tax Policy & Research Group has followed this issue closely and provided a comprehensive Insights memo (Telecommuting & State Income Taxation During COVID‐19) detailing many of the key considerations.

For employees, there are potential personal financial repercussions. Most states require income tax on work-from-home earnings on top of the resident state income tax. This means an employee could face double taxation on the same earnings if they are working in a nonresident state that has a statutory resident rule. The definition of residency differs among states, but often a resident is someone who owns a home and spends a certain number of days in a state (i.e., 183 days). As we are well past the 183-day mark since the outbreak of COVID-19, the issues of statutory residency and double taxation are important to note.

There are six states, including New York, which have a convenience rule—meaning the nonresident state will continue to tax employees that work from home in a different state. Some states are following this trend and enacting convenience rules as well, while others are not. Many states have issued guidance regarding withholding and nexus rules due to COVID-19. Ayco’s Tax Policy & Research team has created a list of state withholding rules for nonresident employees traveling for work (State Telecommuting Charts Related to COVID‐19), and we will continue to expand the list as more information becomes available.

Among our corporate partners, we have seen many implement more definitive policies, for example:

Requiring self-reporting of all days worked in other states and building this into their electronic payroll system
Setting a limit on the number of days before withholding is triggered (this number has varied based on company preference and the individual state’s rules)
Considering moving away from non-resident state tax withholding, by choosing to withhold only for certain states with strict requirements

The rules regarding telecommuting and state income taxation continue to evolve as additional states provide guidance. Therefore, it is important for companies with telecommuting employees to stay on top of the potential withholding implications. Employers with questions may contact Ayco for additional guidance.

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