The Bottom Line
The Bottom Line is where Klatzkin’s advisors provide analysis and insight into key developments in taxation, accounting, and other issues and how they affect businesses and individual taxpayers.

State Tax Considerations for Remote Workers in the COVID-19 Era

By Klatzkin Tax Team

October 22, 2020

The COVID-19 pandemic has had numerous impacts on businesses, including decreased revenue, interruptions in supply chains, and having employees work from home. The pandemic has led business owners to pivot and change how they are operating. One item that may be of concern to some business owners, and often overlooked, is whether or not employees that live in a different state from where the business is located and working from home during the pandemic will cause nexus in different states. To help navigate this tricky issue, we have summarized some key nexus issues and how some states are handling it.

Do remote workers cause taxable nexus in new states and localities based on income?

The Supreme Court of the United States (SCOTUS) has ruled in several cases that the in-state presence of an employee in a state does not give the employer nexus there unless the employee’s function is substantially related to the employer’s ability to establish and maintain a market in the state. Multiple states disagree with this position.

New Jersey, Pennsylvania, and Philadelphia have ruled that if employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy, no threshold will be considered to have been met.

Do you have to withhold state income tax in the employee’s home state if they work from home?

Generally, businesses must withhold income tax on wages paid to employees in the state that the employee is working unless there is a reciprocal agreement between the states. Employees working from home have confused employers. Employers are not clear as to which state they should be withholding income tax.

Both New Jersey and Pennsylvania have ruled that if the employee is working from home temporarily due to the pandemic, both states would not consider that as a change to sourcing the employee’s compensation. The compensation would remain sourced to the state of the business income for all tax purposes.

Do remote workers who have a physical presence in a state cause nexus for sales tax?

For many small businesses, the tax liability created by the sales tax nexus can be substantial. The 2018 South Dakota v. Wayfair, Inc. SCOTUS decision has left many companies scrambling to figure out whether or not they are required to collect and remit sales tax in different jurisdictions based on gross receipts in those states. The pandemic has many businesses trying to figure out if an employee located in a jurisdiction is enough to create nexus.

Again, both New Jersey and Pennsylvania will not impose sales and use tax on companies with employees working at home temporarily due to the pandemic, assuming that the company has not met any of the other filing thresholds. If employers decide to close their offices and remain remote permanently, they should consider whether they have created nexus for sales and tax in a different state.

Contact Us

State and local tax issues are very rarely clear and concise. As we have seen with the Wayfair decision, various states are trying to find avenues for more revenue. Add the COVID-19 pandemic on top of the confusion that already exists, and you have a big mess. If you have questions about the information outlined above or need assistance navigating your state and local tax issues, Klatzkin can help. For additional information, call us at 609-890-9189 or click here to contact us. We look forward to speaking with you soon.

©2020 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.

Contact Us

  • This field is for validation purposes and should be left unchanged.

By Date

Subscribe to Blog