So your simple office environment has been thrown into total disarray by COVID-19…welcome to the club.
As offices closed, stayed closed, and now slowly try to reopen (or not), business owners and employees struggle with the dual issues of how to be safe amidst this new normal and how to get back to the old normal (as best they can).
Welcome to the new world of business—be it Work From Home, or Work From Anywhere.
The challenges employees and business owners face are replicated in the uncertainty faced in the payroll tax and reporting world. That employee who previously worked in New York, but is now working from home in Maryland…how do we handle that? What are the ramifications to her as an individual and to you as the employer responsible for remitting and reporting state income tax (in most cases), state unemployment, and maybe even state disability and locality taxes on her behalf? The decision tree can be a daunting climb, and the technology and awareness required to match the compliance requirements can be equally challenging. So how do you approach this?
Many employers have decided to give a pass to 2020. Not that this is the right answer—state and local taxing authorities still have compliance requirements, and many states have drafted new, very specific COVID-related rules (see Massachusetts…more to come on that).
But the reality and practicality faced by many organizations is that they really did not know how long this would last. How long would the office stay closed? When would employees feel safe coming back into the office or even attempt to get back in via mass transport? Many offices are still out, some have tentative start dates, and some have just deferred until some time in 2021.
Because of this, many employers are rolling the dice on 2020 and setting their sights on coming into compliance in 2021—either with permanent changes being made or with short-term alternatives, like hybrid schedules or target reopen dates. The common thread is establishing the new payroll priority and implementing it.
As 2020 comes to a close, most of the states that have implemented COVID-related payroll relief may see those rules come off the books.
For example, New Jersey allowed employers with employees who were regularly based outside New Jersey but now working within New Jersey to continue the other state withholding and reporting while the COVID emergency was still in place, if they chose to do so.
However, on October 19, the New York Department of Taxation and Finance published a series of FAQs, one of which addressed the question of whether an employee whose primary office is in New York but has been telecommuting as a result of a COVID closure still has New York state income tax responsibility. The Department asserted that yes, unless the employer has a “bona fide” office from which the employee has been working, then this could be considered New York source income, in accordance with its long-standing Convenience of the Employer position in this scenario (even pre-COVID).
Not surprisingly, New Jersey fought back by introducing state Senate bill S-3064, that directs a legal review of the situation and how to best protect New Jersey residents in this case. An amendment to the bill specifically noted the New Hampshire brief to the Supreme Court (see below) as well. Stay tuned for more on this.
Similar to the asserted New York position, Massachusetts requires employers with pre-pandemic Massachusetts based employees to withhold and remit Massachusetts income tax to the Commonwealth, even if services were provided outside the state. This has recently resulted in New Hampshire filing a Motion for Leave to File a Bill of Complaint with the U.S. Supreme Court against the Commonwealth of Massachusetts for improperly and unconstitutionally taxing non-Massachusetts residents/employees, even though no work was performed in Massachusetts. This case, should the Supreme Court decide to take it, could have broad implications for the states that view this similarly, such as New York and Pennsylvania.
So what should employers be considering as we head into 2021?
Here are a few thoughts:
Since the payroll tail does not wag the dog here, consider your organization’s overall position with respect to employment and be prepared to work with that. If the office will remain closed indefinitely, work with that. If there is a set date to return, move in that direction. It is important to align the payroll reporting aspects of your business to the direction of the workforce.
Make a clear decision as to whether you will have a Work from Home (WFH) policy or a Work from Anywhere (WFA) policy. There is a huge, and potentially costly, difference. WFH generally aligns an employee to their resident state to perform services, which allows for clear withholding and reporting compliance. WFA can be just that…Anywhere. Imagine an employee going on a 20-state road trip and working in all those states along the way. How could you possibly comply? Consider specific guardrails for your employee population in order to protect them from tax issues and also to protect your organization.
Work with your tax department as you consider WFH vs. WFA. There is also a hybrid version, which allows employees to work from specific states that the company deems appropriate. There could be states where, for non-payroll tax purposes, the company just cannot have employees perform services. You can lock out employment occurring in that state, if properly handled.
Beware of global employees. In this case I am not referring to global travelers visiting another country where you are obtaining business. I am referring to someone deciding they are going to spend the winter in the South of France providing all their services to you virtually. This opens the possibility of creating something called Permanent Establishment in a foreign country—essentially having the U.S. entity be deemed to have opened an office there. This could create enormous tax and legal issues. Again, you can build guardrails around this using workplace policies.
Establish strong corporate communications with your employees and put in place your own guardrails. For example, a New York-based employee and resident says he is going to spend the winter working in Florida; he asks you to stop his New York withholding for three months and gives you a new Form W-4 with a Florida address. You may want to tell him to not do that, as he will still owe New York income tax on ALL his compensation at year end and may be significantly under withheld. However, if there is nothing in your corporate rules prohibiting this, and if he approaches the process properly, this may be technically permissible—although not necessarily advisable (see New Hampshire v Commonwealth of Mass) as New York may still require taxation. Beware of giving personal tax advice in this case, even though you think it is for the employee’s own good.
The bottom line is that 2021 may not be a return to normalcy in the workplace, but it should encompass a return to compliant payroll withholding, remitting, and reporting processes and procedures.
As an organization you can set some rules, such as in the WFH vs. WFA space, but in many other areas, you are merely the conduit to proper compliance. With states running short on funds, it is likely that income tax and unemployment tax audits could increase over the next few years, and it is up to you to protect the company and comply as best you can with this new normal we all are facing.
Individuals who have questions regarding the information noted above should contact their E. Cohen advisor or call us at 301-691-3600.
Article by contributing author Scott Schapiro, President and founder of EX4 Payroll Tax Consultants, LLC.