Here are the big tax headaches that could hit firms and employees who work from home.
Because of the pandemic, many businesses in the Philadelphia region were forced to shut their doors and send employees home to work. And many companies — large and small – will be continuing to require these work-from-home policies for the foreseeable future. But depending on how long these practices continue, those employers and their employees may be facing some local tax consequences.
For employees, it’s about the length of time they’ve been working from home and where their company is located. Both Pennsylvania and New Jersey have reciprocity agreements which eliminate wage sourcing issues for these employees. So there is agreement not to additionally tax the wages of a resident of the other state.
But if you’re a New Jersey employer forced to send your employees home, and an employee decides to work from a state outside of the area, both the company and the employee could be subject to tax payments and filings in that state. Many states require individuals to file and pay income taxes if they are a resident there for more than six months (it’s 183 days in New Jersey, for example).
“This may be happening with your younger employees who decided to move back in with their parents in another state,” says Cynthia Ragan, a certified public accountant and tax manager at Isdaner & Company in Bala Cynwyd. “Both employees and employers need to be aware that they may be coming up on that resident requirement.”
Although, guidance has been limited, Ragan assumes that the states are going to “want their money” from residents. “You can probably get credits and refunds,” she says. “But I don’t think most people are going to know what to do.”
Speaking of refunds, there is some good news for nonresident employees of Philadelphia companies who were paying the full wage tax but who have been mostly working from home outside of the city. According to Ragan, those employees could apply to the city for a refund of those taxes, as long as their employer approves.
All of these issues will potentially create tax-filing headaches and additional steps for employers and their workers. But unfortunately employers have yet another work-from-home tax problem to consider: that’s one of nexus.
Nexus means the extent that your business is present in a state in order to be subject to potential state taxes. As mentioned above, New Jersey and Pennsylvania have reciprocity for employee taxes. But the playing field is different when it comes to having a physical presence that could trigger sales and/or corporate income taxes. Both Pennsylvania and New Jersey use various criteria to define nexus, including sales in their state and whether or not there’s a presence there.
Matthew D. Melinson, a partner at Grant Thornton in Philadelphia, warns that having employees work in New Jersey may create that presence. And if that’s the case, a company could owe New Jersey income and sales taxes. “The New Jersey Superior Court held in 2012 in Telebright Corporation Inc. v. Director, N.J. Division of Taxation that the presence of a single telecommuting employee in the state created sufficient nexus for an out-of-state corporation with no physical office or payroll in the state,” he and colleagues recently wrotefor the Pennsylvania Institute of Certified Public Accountants.
Nexus issues for employers aren’t just a concern for Pennsylvania and New Jersey. If an employee goes to another state to work remotely, employers need to be aware of nexus rules there as well. “Physical presence could be established in a new state for some businesses with simply a single employee working from home, let alone an entire workforce working remotely over many jurisdictions,” say attorneys Michael R. Bartosik and Steven M. Packer at Duane Morris in Philadelphia. “The presence of an employee in a new taxing jurisdiction could create nexus for the employer for income and franchise tax, sales and use tax or other business taxes. This may result in filing obligations that never previously existed.”
Right now and due to the pandemic, both Pennsylvania and New Jersey (as well as Philadelphia) have issued guidance that they will not challenge a company’s nexus or seek to impose net income or wage taxes for an out-of-state or city business solely based on the temporary work activity of its employees. Also, and, at least for now, New Jersey and Pennsylvania have told employers to continue their withholding of taxes from employees who normally work within their state but are now temporarily working in other jurisdictions. But some states, according to Ragan, are “silent” on the pandemic and its impact on nexus.
Regardless, and at some point, things will return to normal and you can bet that these cash-starved states will be looking for revenue anywhere they can get it. If your company continues with its work-from-home arrangements, both you and your employees need to consider the extra state and local tax requirements that may be incurred.
“It’s going to be very important for businesses to tell their accountants where their employees are located and whether or not some of these work-from-home arrangements will become permanent,” says Ragan.