Tax Laws Lag Behind Current COVID Reality
Tax laws must catch up with what has happened with the world as a result of COVID-19.
This was the assessment of panelists at the Tax Section Annual Meeting, “An Update on New York’s Pass-Through Entity Tax and the State Tax Implications of Remote Work.’
With employees telecommuting from a variety of locations during COVID — including their permanent addresses, vacation homes in other states and parents’ homes — the lines have blurred between where people are working and to which office they are assigned.
“This has exploded since the pandemic. As practitioners, we have seen this for years,” said Alysse McLoughlin of Jones Walker. “This is affecting many more people because of people working from home.”
Some individuals may end up becoming statutory residents of the states where they are sheltering.
New York has the most recognized “convenience of the employer test,” although McLoughlin argued that it is “to some extent, antiquated, because this seemed to have more relevance in a time period where people really did work from one office all the time.”
Convenience has been broadly defined in New York cases. Required out-of-state work is permitted. But if the work could be done in New York, there could be trouble, said McLoughlin.
When non-resident telecommuters are assigned to a New York office but perform their services out of state for their convenience rather than the employer’s necessity, New York will require the employers to withhold income tax on all of these employees’ wages. Employers can establish the taxpayer’s home office as a bone fide employer office and count days worked at that office as non-New York days, but New York imposes a strict factor-based test to these arrangements.
Even if the state of residence does allow a credit for the other state taxes, an incremental tax increase may occur when the resident state rate is lower than the state in which the employee’s work office is based. Whether a new or existing employee job is classified as in-office or a remote job, or is in commutable distance or not is irrelevant. Connecticut, Delaware, Nebraska and Pennsylvania also apply the convenience rules. New Jersey stopped after Jan. 1, 2021 and now sources income based on where the service or employment is performed.
Convenience of the employer rules can result in double tax for a telecommuter when the employee’s state of residence does not provide any credit paid to the state of the employee’s work office for services performed while working from home.
In general, if the employee works from home for their own convenience, the workdays at home will be treated as days worked as the assigned work location.
Connecticut’s rule is more generous than New York’s. It only applies if a taxpayer’s home state also applies the test.
Massachusetts applied an emergency regulation during COVID and continued to tax out-of-state residents teleworking for a Massachusetts employer. It also allowed residents working from home in Massachusetts for an out of state employer a credit for taxes paid to that state under a convenience rule.
States generally require employers to withhold tax based on where an employee performs services (may be the employee’s “residence” state). States may also require withholding if an employee travels for work purposes to another state.
As employers begin to consider “work from anywhere” arrangements, they will need to put procedures in place to know where employees are working to ensure proper withholding.
What is an employer’s obligation to determine the employee’s location or residence? Can the employer rely on information provided by the employee?
Most of the time they can, unless they have knowledge or reason to believe it’s wrong, said McLoughlin. “There are ways to eliminate the abuse. Companies wouldn’t let people work from home if they thought the job wasn’t getting done.”
Some employers might prefer remote options because they can downsize offices and reduce costs, noted McLoughlin, but it might not be enough. Answering emails on the train ride home to another state or on the weekends can create issues about what constitutes working from home.