How is payroll affected by employees working remotely?
In the spring of 2020 as the COVID-19 pandemic began to lockdown the nation, many organizations found themselves with a remote workforce because of stay-at-home or shelter-in-place orders. At the time, many thought organizations would slowly phase their employees back to public workspaces. Yet, nearly one year later many are still remote, some working in new locations. As 2020 payroll reports wrap up and a new year begins, organizations question how to address payroll reporting and state compliance for employees now working in other states.
Are we reporting employee wage withholding and/or unemployment earnings to the correct state? What is the correct way to report wages when you have employees that may not return to the office regularly or at all once the pandemic is over? What about employees that, upon realizing they could work entirely remotely, have permanently moved to new states?
At the onset of the pandemic, several states made exceptions to normal withholding requirements for teleworking employees due to the declared State of Emergency orders; however, there have been little to no updates to those original announcements.
It is important to distinguish that while employee wage withholding may be required for an employee for more than one state based on where they are working, unemployment is generally reported to one state. Employee wage withholding is based on where the wages are actually earned by the employee for their services performed. If an employee splits their time between two states for work, you most likely need to allocate the wages earned and withhold for both states accordingly.
States vary significantly on when withholding becomes required for a nonresident employee. In some states, withholding is required on the first date that an employee performs services in that state. Other states have thresholds based on earnings paid or number of days worked in that given state. Employers with employees who are working remotely in neighboring states should understand if there is a reciprocal agreement between those two states. A reciprocal agreement allows an employer to only withhold wages for an employee’s state of residence even if they are receiving wages for services performed in the other state. In order to take advantage of this agreement, proper documentation must be obtained from the employee and maintained by the employer. If an employee works remotely in another state due to the pandemic and will fully return to work once the state-of-emergency order ends, the state in which the employee normally works and the state they presently work in should be reviewed to determine if existing exceptions are available.
Reporting unemployment compensation to the state which the employee’s services are localized is required. States follow “localization of work” provisions that were established by the U.S. Department of Labor in order to avoid duplicate coverage or no coverage when an employee works for an employer in more than one state. Generally, services are localized within a state when services are performed entirely within the state or when the services performed outside of the state are incidental to the services performed within the state. If the services are not localized in one particular state, then a hierarchy is used to determine where the employee’s base of operations is located.
Consideration must also be given to employees that will transition to teleworking permanently or that have relocated during the pandemic, as those work arrangements are no longer temporary, and will most likely require a change in reporting. Not-for-profit organizations are often allowed an election to be a reimbursing employer rather than a contributing employer, so the organization should ensure registration is completed in the appropriate states and the election is made, if desired.
Last, but certainly not least, having an employee working remotely in another state can create additional compliance requirements for the organization that it may not have prior. Remote employees can create income tax, sales and use tax, gross receipts, local occupational taxes, various excise taxes or local license filing requirements. It is critical to consider all compliance implications, in addition to payroll, when evaluating employees in new states or jurisdictions.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
