2020 has been a year of change and adaptation. The pandemic has impacted how companies operate within our business communities as well as how we, as individuals, manage the operations of the companies we run as owners and work at as employees. We have had to adapt with many people working from home often in a state other than where their office was previously located. This change in work location can have state tax consequences.
For some, the temporary adaptation of working from home is leaning towards the permanent. This is evident in the states' recent developments regarding how they will modify statutes to collect income tax, payroll tax and sales tax. The need for tax planning is critical. Unplanned tax consequences from COVID-19 can mean tax implications for you, your company and your employees
State Tax Issues – Who is a resident and non-resident?
If an employee is a resident of one state, their employer may be subject to that state's income tax regulation. Likewise, an individual resident of a state is taxed on their worldwide income, and a non-resident individual is subject to that state's income tax only on income that has been sourced to that state. The issue of wage income sourcing for non-residents who are working remotely from where their employer’s usual place of business is located has been addressed to some degree by states.
Each state defines a resident for state income tax purposes with many states using a bright line test of 183 days as written in their statutes. Stay a day longer, and you could be considered a statutory resident. Residency takes into consideration other factors. Residency can be based on where you intend to domicile, and there are many factors that determine whether you are domiciled in a state. Basically, do you intend to remain in that state or are you there for a temporary purpose?
At what point are you considered to be either working in a state that is different from your employer or business you operate, and how does that fit into that state’s residency rules for taxation? Everyone needs to be cognizant of different statutory definitions as they apply to income tax and the other taxes associated with employment. However, all companies may not be up to date on COVID-19 guidance. You may have to plan now to account for how income has been apportioned outside a state of emergency, as our employment relationship changes from working in an office to working from home or some hybrid version. Making sure you are not being taxed on worldwide income by more than one state is important. If you are a resident of two states, you may not receive the customary credit for taxes paid to another jurisdiction. This would result in a double state tax on employee earnings and ramifications to the employer.
Most States Offer Guidance, But Some Don’t – What does it mean?
Unfortunately, some states have not offered specific guidance related to COVID-19. If you work in a state that offers no exception for COVID-19 circumstances, then you could possibly create nexus for the business. Some of these states, such as Vermont, have not offered specific guidance but have commented that they will not intentionally seek audits on employees working from home temporarily due to the pandemic.
Taking a different tact, some states will not consider temporary changes in the employee’s physical work location when determining whether to impose either nexus or to alter the apportionment of income for those businesses and employees. This only applies during the periods in which temporary telework requirements are in place due to the pandemic. Yet other states also include this as an exception from establishing nexus and require the order of a physician in those cases related to the pandemic.
As of this writing, among the six New England states, Massachusetts and Rhode Island have specific guidance. Each specifically states that they will not assert nexus on the company, nor will they double tax a resident employee because of the circumstances surrounding the pandemic until after the state of emergency in their state has been lifted. Massachusetts has recently finalized guidance to replace the emergency rules through the end of the year. The Massachusetts state government also mandated that if your place of employment was physically in MA and you continue to work for that employer from home during the pandemic, MA will still tax those wages as MA source even if your home is outside the Commonwealth of Massachusetts. The Commonwealth went on to define apportionment based on number of working days and allows credits for taxes paid to other states by residents who worked outside of MA before the pandemic.
These differing treatments from state to state based on minimal guidance makes tax planning critical for both businesses and individuals as you make decisions about working from home and the impact of the pandemic. If your office shut down in mid-March, then as of the date of this article, you and your employees may have already surpassed the 183 days needed to be considered a statutory resident of a state. Six months after shutdowns began, tax and accounting concerns are still unclear in many states. It is important to ensure that your tax plan takes into consideration the numerous and significant impacts of the pandemic.
Please reach out to a member of your DGC client service team or Scott Treacy, CPA at 781-937-5393 / firstname.lastname@example.org to consider your tax planning options. You can also visit our coronavirus web page at dgccpa.com/coronavirus which is frequently updated with resources to help you deal with the impact of the coronavirus on you and your business.