As if COVID-19 hadn’t created enough headaches for employers and employees alike, here’s another potential brainbuster to consider as we head into tax season.
When businesses nationwide shifted overnight to work-from-home arrangements in response to the pandemic, many of them now had employees doing their jobs in states where those companies had never had to pay taxes before.
That has a potentially significant impact on the employer’s tax payments, since many states traditionally deem an organization as having a taxable relationship – or “nexus” – with the state if it has even one employee working there.
In such cases, it doesn’t matter if the employer has no office or property in that state; one employee working could be enough to trigger obligations to pay that state’s business-income tax, use tax, franchise tax, payroll tax, brass tax, thumb tax, or any other kind of tax you can think of.
And yes, that might include an obligation to withhold employee income in the event that he or she might owe personal income tax in a given state.
So you can see how having your employees work from their out-of-state residence (or their parents’ house in Indiana, or their time-share in Colorado, or anywhere else they’ve been holing up for the pandemic) might add some unwanted spice to this year’s tax calculations.
I realize that for employers here in metro Seattle, such considerations might not have sunk in right away, since unlike Portland and many other major cities we don’t have people routinely commuting from across state lines. But if you have folks who – for whatever reason – have done a significant amount of work during the pandemic from out-of-state, this whole issue is definitely relevant to you.
There have been some good summaries of this topic, and I advise that you check them out for further detail. We’re not attorneys or accountants, so we won’t even presume to guide you on how to handle this situation – except to say that you should be aware of it, and seriously consider getting expert guidance on the matter.
Our own suspicion is that the COVID-related mass shift toward work-from-home may give new momentum to legislative efforts that had already been underway to clarify state-nexus issues for a new era of mobile workplaces. But we shall see. ###