Nationwide stay-at-home orders issued in response to the COVID-19 pandemic may impact withholding requirements for multistate employers.
Employers are generally required to withhold income tax from wages of employees based on where the employee works. Under normal circumstances, when employees work from the employer’s place of business, employee wages are sourced to the state in which the employer is located.
In the midst of the pandemic, however, employees may be required to telecommute from a neighboring state. This raises questions concerning whether employers must adjust their withholding practices and begin sourcing income based on where employees are telecommuting during the COVID-19 shutdown.
States are beginning to issue guidance regarding what employers must do in these circumstances. New Jersey and Mississippi, for example, have stated that employers should not adjust their withholding practices based on COVID-19-related telecommuting arrangements. As Mississippi’s Department of Revenue explained, the state will not assert any new withholding obligations on employers because of employees temporarily telecommuting from Mississippi.
Though New Jersey issued a similar announcement, the state’s guidance must be considered in light of the complex rules of its neighboring states, particularly New York’s “convenience of the employer” rule. That rule considers any days worked from an employee’s residence outside of New York for a New-York based employer to be New York source income unless the nonresident employee worked from home by necessity. It is not yet clear whether New York would require new withholding requirements for New York-based employees telecommuting from New Jersey (or another location) during the COVID-19 crisis based on its interpretation of that rule.
Not all states will waive the imposition of new withholding requirements due to the pandemic. Recent guidance issued by Maryland and Minnesota requires employers to apply existing rules and withhold based on the employee’s physical location. Minnesota’s Department of Revenue, in addressing what is likely a rare occurrence, stated that employers may need to adjust the apportionment applied to wages of nonresidents temporarily telecommuting from Minnesota based on the number of days that they physically work in Minnesota. A similar standard would apply in Maryland, though Maryland’s reciprocity agreements with neighboring states would largely eliminate any effect from the state’s policy.
In addition to state-level withholding, similar considerations may arise in connection with other local income taxes. For example, the city of Philadelphia on April 14 issued guidance stating that nonresidents who are telecommuting from home due to COVID-19 are not liable for the Philadelphia wage tax that normally must be withheld from the wages of nonresidents working in the city.
More states and local governments are expected to address the withholding implication of telecommuting as the COVID-19 crisis continues to cause uncertainty for employers across the country.
As the number of cases around the world grows, Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.