State Tax Implications of Remote Workers

Do out-of-state remote workers change your business’ state income tax liability in other states? It may depend where they are.

Millions of Americans have shifted to working remotely from their homes as a result of the COVID-19 pandemic, and that is raising state tax concerns for business owners who now have at least part of their workforce located outside the state where they conduct business.

Generally, a business who employs individuals in a particular state would be deemed to have created a state income tax filing requirement (i.e., nexus) by having employees in the state. Companies with nexus in more than one state are required to apportion their income to determine their taxable income in each state.

Moreover, with regards to apportionment, employees in the state would increase the payroll factor for states that still use a three-factor apportionment formula in computing state taxable income. (The three-factor formula looks at the company’s property, payroll, and sales in a taxing state as a percentage of its total property, payroll, and sales.)

For example, many New York-based companies employ residents of neighboring states (i.e., Connecticut, New Jersey) who commuted daily into the city pre-pandemic and now are working from their homes in these states. Are these states going to impose income taxes on New York-based businesses that, but for the presence of employees in the state due to stay-at-home orders, would otherwise not have nexus or a payroll factor in the state? Time will tell.

As of April 30th, only eight states (Indiana, Massachusetts, Maryland, Minnesota, Mississippi, North Dakota, New Jersey, and Pennsylvania) and the District of Columbia have issued guidance that remote workers will not impact nexus nor would they impact the payroll factor for apportionment purposes. Since most states have either suspended or adjourned their legislative sessions for 2020 as a result of the COVID-19 closures, we will have to wait and see which other states issue similar guidance and which will not.

Kaufman Rossin’s tax professionals continue to monitor the federal, state and local tax impacts of the COVID-19 pandemic. If you have any questions or concerns about how recent changes may affect your business, contact me or another of our tax professionals today.