Even with an increasing number of employers calling their workers back into the office following the pandemic, many employees across the United States are still working from home or otherwise working remotely. While many employers tout the flexibility of work-from-home as a benefit for employees, managing a remote workforce can raise a number of multistate compliance challenges. In particular, remote and hybrid work has significant implications for employers’ state and local tax withholding and unemployment insurance contribution obligations. Planning ahead with appropriate policies and procedures can help employers ensure compliance with federal, state, and local laws.
- Employers may have state or local income tax obligations, and unemployment insurance contribution obligations for remote employees in the states and municipalities where remote employees perform their work, even if an employer has no other connection to that jurisdiction.
- Implementing a clear remote and hybrid work policy is key to ensuring compliance with state and local laws, fostering uniformity in the treatment of workers and performance standards, and providing a groundwork for individualized remote work plans.
State and Local Income Tax Withholding
The general rule is that an employer has an income tax withholding obligation for the jurisdiction where services are performed by each of its employees. This may require employers to be up to speed on state and local withholding requirements in each jurisdiction in which they have one or more employees working, whether the workers are in the office or working remotely. For example, if an employer is based in South Carolina, but has an employee working from home in Georgia, the employer is likely to have an income tax withholding obligation in Georgia even if the only connection to that state is the employee working there.
Some states have bilateral reciprocal agreements with other states where each state effectively agrees to tax only their own residents even if a nonresident from a state with which they have an agreement were to perform services within its borders. Some states have also implemented the “convenience of the employer” rule that enables the state to tax nonresidents who work for in-state employers when the employee is working outside of the state (not at the in-state employer’s place of business) for their own convenience rather than due to a business necessity.
An employer may have tax withholding obligations even if employees fail to inform the employer that they have relocated and are performing services from a different jurisdiction. An employer’s lack of knowledge of an employee’s move likely will not excuse the employer’s tax withholding obligations because employers are expected to know the location from which their employees are working. If an employee has been working remotely from another state without the employer’s knowledge (or permission), the employer may be obligated to retroactively correct the tax reporting for that employee.
To keep tabs on employees, employers may look at so-called digital breadcrumbs (e.g., IP login information) to determine if the employee is working from where they say that they are. Regardless of whether an employee asks the employer for permission to work at a new location before doing so or forgiveness only after being caught, states may hold employers accountable for tax withholdings.
Unemployment Insurance Contributions
Unfortunately for employers, the analysis to determine to which state unemployment insurance contributions are made is a more complex process. There is a four-part test that each state has passed to determine to which state contributions should be made. First, the employer must look at where the employee’s services are localized, meaning the place where the predominant amount of their service is performed such that that service provided elsewhere would be considered transitory or incidental in nature. Second, if an employee’s services are not localized, then the employer must look to where the base of operations is, meaning the place where the employees start and end their day. Third, if an employee has no base of operations, the employer must look at the place of direction and control, basically, where the employee’s manager or boss sits. Fourth, the catchall looks at the state of residence of the employee.
Hybrid Workers Between States
Having a hybrid workforce, meaning employees are permitted to work part-time from their assigned office and part-time from home, adds another layer of complexity. Often for income tax withholding purposes, employers will be required to allocate the wages earned by the employee between the two jurisdictions based on the amount of time spent in each state. Whereas with unemployment insurance, contributions should only be made to one jurisdiction, even if an individual works in more than one state; typically, unemployment contributions are made to the state where the employee is providing more service.
Further, an employer may incur tax-withholding obligations when an employee works remotely in a new jurisdiction for only a temporary period. Technically, tax-witholding obligations are triggered even when employees travel and work for only a short period of time (e.g., one day). In general, a majority of states do not have a minimum threshold for earnings required before a nonresident traveler working in their state is subject to income tax withholding. For example, the issue may arise when an employee travels out of state for two weeks to visit family and takes vacation time for a week but works remotely for another week. The employer may have tax-withholding obligations for that other state. Moreover, a growing number of municipalities and localities are implementing taxes on earnings in those jurisdictions so employers may have local withholding obligations as well.
Remote Work Policies
These types of issues make it important for employers to consider implementing a strong workplace policy governing remote work and hybrid schedules. Among other provisions, a remote work policy can set forth:
- the process by which employees request permission to work remotely;
- the factors considered by the employer in the approval process;
- which positions in the company are eligible to work remotely;
- when, where, and how often employees are allowed to work remotely;
- where workers are expected to work when working remotely;
- information security measures employees are expected to take; and
- communication expectations with managers and other members of their team.
Such a policy can guide not only employees but managers and human resource professionals who have to manage a remote workforce. The policy can ensure that employees understand the attendance and sick leave policy and know what is required of them in terms of performance and productivity targets. A policy can further serve as the groundwork for individualized remote working arrangements, particularly if remote work is provided as a reasonable accommodation for an employee with a qualifying disability under the Americans with Disabilities Act (ADA).
While many employers believe remote and hybrid work schedules can be a win-win for employers and their employees, this can be overwhelming and create a number of issues that employers may not have considered prior to allowing remote work. Employers may want to confirm where their employees are performing work to ensure compliance with any state and local income tax withholding or unemployment insurance obligations, and to have specific policies in place in advance of allowing remote work to address situations in which employees will be permitted to work someplace other than their assigned office.
For more information on managing remote workers, please join us for our upcoming webinar, “Multistate Compliance, Part I: When Managing Remote Employees, One Size Does Not Fit All,” which will take place on Wednesday, September 6, 2023, from 2:00 p.m. to 3:00 p.m. EDT. The speakers, Michael K. Mahoney, Melissa M. Pesce, and Dee Anna D. Hays, will discuss best practices for general remote work policies, how policies for in-office employees and remote workers overlap, and other considerations for individualized plans/policies for employees who are working from home. Register here.
In addition, Michael K. Mahoney and Melissa M. Pesce joined hosts Dee Ann D. Hays and Susan M. Gorey on their podcast, “Multistate Monday: Tax Consequences of Fully Remote, Hybrid, and Temporarily Remote Workforces,” to discuss key issues for employers with remote workers.