Telecommuters and Taxes
Tax & AccountingMarch 09, 2021

State Income Tax Nexus Rules for COVID-19 Telecommuters

(NEW YORK, NY, March 2021) — States continue to issue income tax regulations and other guidance on employee telecommuting during the COVID-19 emergency. This includes guidance about:

  • income tax nexus
  • appointment or sourcing of wages
  • wage withholding obligations

Does COVID-19 Telecommuting Create Nexus?

In normal times, employees who telecommute from a home office on a regular basis will create nexus for their employer in most states. 16 states and the District of Columbia will not assert nexus on this basis during the COVID-19 emergency.

  • Alabama
  • California
  • Georgia
  • Indiana
  • Iowa
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • Mississippi
  • New Jersey
  • North Dakota
  • Oregon
  • Pennsylvania
  • South Carolina
  • Wisconsin

Does COVID-19 Telecommuting Change Apportionment or Sourcing Rules?

All states and the District of Columbia have corporate income tax apportionment formulas. A taxpayer must use the rules to assign income to the various states where it is doing business.

In many states, the apportionment formula contains a payroll factor. Taxpayers must include income from services performed by employees in the payroll factor.

Employees telecommuting during the emergency will not increase an employer’s payroll factor or apportionment formula in 8 states.

  • Alabama
  • Maryland
  • Massachusetts
  • Mississippi
  • North Dakota
  • Pennsylvania
  • Rhode Island
  • South Carolina

States also require nonresident individuals to file tax returns and pay tax on income from work performed in the state. Nonresidents generally must assign that income to that state based on the number of working days spent in the state. 8 states continue to apply those filing and sourcing rules to nonresidents who telecommute during the COVID 19 emergency.

  • California
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • New York
  • Pennsylvania
  • Vermont

Do COVID-19 Telecommuters Trigger Withholding Obligations?

Employers with a place of business in a state must withhold income tax from employee wages if they are subject to federal withholding. State income tax withholding requirements apply to both resident and nonresident employees.

9 states do not require additional withholding from out-of-state employers for their employees who are now telecommuting in the state due to COVID-19.

  • Alabama
  • Georgia
  • Maine
  • Massachusetts
  • Mississippi
  • Nebraska
  • New Jersey
  • Rhode Island
  • South Carolina

6 states said that employer withholding rules do not change when residents telecommute from the state.

  • Illinois
  • Iowa
  • Kansas
  • Kentucky
  • Maryland
  • Pennsylvania

Illinois and Kansas will waive penalties and interest for employers who fail to meet withholding requirements for employees who are working at home during the emergency.

Missouri allows certain employers to elect to withhold and pay tax for work performed from a temporary location. The election applies to employers that did not maintain a time and attendance system for all employees on or before March 13, 2020:

  • who worked in the state before the COVID-19 emergency
  • and who are performing that work at their home in another state during the emergency

New Hampshire, which does not impose a personal income tax, is challenging the rule in the U.S. Supreme Court on various constitutional grounds.

States are likely to reexamine how to handle taxation of remote workers for the duration of the pandemic and afterwards if the temporary work arrangements become permanent.

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Tim Bjur, PD
Senior Content Management Analyst
Tim Bjur is an attorney and senior content management analyst for Wolters Kluwer Tax & Accounting, who has spent the last 18 years analyzing state income tax legislation, case law, and regulatory developments. He offers a detailed understanding of state personal and corporate income taxation and trends across all states and has been quoted in top media publications, including Forbes and CNBC.