Many employees have become remote workers either by mandate or in an abundance of caution during the COVID 19 pandemic. As a result, employers are having to deal with many new issues that they did not have before including foreign state and local employment laws and tax consequences. If a business has employees who reside and work in the state different from where the business is physically located or operates, an employer may face unexpected state and local taxes in the coming year. Remote workers also could find that they will need to pay income taxes to more than one state on the same income earned.
Usually there is an established protocol between states that neighbor each other for such issues. In most cases, if an employee lives in one state but has been working another, the employee receives a credit on their resident return to offset the non-resident state liability. However, that is not always the case. Six states: Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania follow what is known as the “convenience rule.”
For example, if an employee's job is based with an employer in New York, but he or she lives and works in another state out of convenience rather than because the employer requires it, then that employee owes income to New York where the job is based. The problem is that New York and the other five states have not issued guidance pursuant to the pandemic crisis. Therefore, the “convenience rule” has left businesses with uncertainty as to how state tax agencies may rule on the issue should employers reach the conclusion that income employees earn working from home outside of the state during the pandemic emergency is exempt from foreign state income and income tax withholding. Legislation is pending in these states to address this issue, and employers in these states should monitor their progress to see how they develop.
Also, employers should be mindful that the labor and employment laws of the state where a remote employee is working generally will apply to the employment relationship. These laws may relate to wage and hour, workers’ compensations insurances, unemployment insurance, etc.