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Practical Solutions to Tax Issues Facing
Employers With Increased Telecommuting
December 8, 2020
Presenters
2
Moderator:
Matt HunsakerLeader of the State
and Local Tax Team
BakerHostetler
Panelist:
Ted BernertPartner
BakerHostetler
Panelist:
Dave EbersoleAssociate
BakerHostetler
Panelist:
Mike Semes
Of Counsel
BakerHostetler
Panelist:Liz Bucko
Senior Director
Compliance Products
UKG
Disclaimer
These materials have been prepared by Baker & Hostetler LLP for
informational purposes only and are not legal advice. The
information is not intended to create, receipt of it does not
constitute, a lawyer-client relationship. Readers should not act
upon this information without seeking professional counsel. You
should consult a lawyer for individual advice regarding your own
situation.
3
Overview of Today’s Discussion
• Background
• Know your tax environment
• Consider the impact of changing the place of withholding on the employer’s business taxes
• Revise or adopt policies– Where employees may work or are
required to work
• Keep and maintain records– Where employees perform work
• Summarizing business solutions
4
Withholding for Work-At-Home Employees
• Increased levels of working from home are creating challenges for employers.
• Issue has two aspects:
– During the current pandemic; and
– Longer term
• Some states and cities have provided safe harbors during the pandemic for employers to continue existing withholding practices.
• This has prevented a major disruption of withholding procedures for employers - but issues remain.
5
Hypothetical Case
6
Employee
Residence
Pre-COVID
Office
Employer Employee
New JerseyPhiladelphia May continue to withhold Wage Tax File for refund of Wage Tax in 2021
Pennsylvania Withhold NJ tax* Pay NJ tax
Delaware
Philadelphia May continue to withhold Wage Tax File for refund of Wage Tax in 2021
Pennsylvania Withhold PA tax** Credit on DE return? Refund of PA tax
withheld?
* Because of PA/NJ Reciprocity Agreement.
** Is PA’s guidance correct?
Employer
(Philadelphia, PA
Office
Employee
(NJ
resident)
Employee
(DE
resident)
• New Jersey and Delaware residents regularly worked at employer’s office location in Philadelphia
• Because of COVID, their employer requires them to WFH.
• Results can vary . . . even within a state!
Know Your Tax Environment
• Reciprocity agreements
• Convenience of the employer rule
• Special rules during the pandemic
• Possible legislation
7
Reciprocity Agreements
• Reciprocity agreements among states may relieve employers from obligation to withhold income tax.
– Provided employee certifies nonresident status via required forms.
• Example: Ohio has reciprocal withholding agreements with surrounding states Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia.
– Ohio employers not required to withhold for a Pennsylvania resident working in Ohio (if nonresident certification provided).
• Review whether business locations are in states that have reciprocity agreements.
8
Reciprocity Agreements
9
State Reciprocity Agreements with:
Arizona CA, IN, OR, VA
Arkansas Texarkana, TX, residents working in Texarkana, AR (only).
District of Columbia MD, VA
Illinois IA, KY, MI, WI
Indiana KY, MI, OH, PA, WI
Iowa IL
Kentucky IL, IN, MI, OH, VA, WV, WI
Maryland PA, VA, District of Columbia, WV
Michigan IL, IN, KY, MN, OH, WI
Minnesota MI, ND
Montana ND
New Jersey PA
North Dakota MT
Ohio IN, KY, MI, PA, WV
Pennsylvania IN, MD, NJ, OH, VA, WV
Virginia KY, MD, PA, District of Columbia, WV
West Virginia KY, MD, OH, PA, VA
Wisconsin IL, IN, KY, MI
Convenience of the Employer Rule
• “Convenience of the employer” rules:
– Assign payroll to the employer’s office even when employees
work from home, with only limited exceptions.
• States with “convenience of the employer” rule include:
– Arkansas, Connecticut, Delaware, Nebraska, New York, and
Pennsylvania.
• Rule upheld against constitutional challenges in Court of
Appeals of New York.– See, Huckaby v. New York State Div. of Tax Appeals, 829 N.E.2d 276
(NY 2005); Zelinsky v. Tax Appeals Tribunal of State, 801 N.E.2d 840
(NY 2003)
10
Special Pandemic Rules for WFH
• Monitor legislation and administrative guidance.
• Income tax withholding:– AL, GA, MA, MD, MN, MS, NE, NJ, PA, RI, SC, VT
– Local taxes: OH, MI, St. Louis, MO, Philadelphia, PA, Charleston, WV
• Corporate income tax nexus:– AL, AZ, CA, DC, GA, IA, IN, MA, MD, ME, MN,
MS, ND, NE, NJ, OR, PA, RI, SC, WI
• Sales and use tax nexus:– ME, MA, MN, NJ, PA, RI
11
Litigation of Pandemic Tax Rules
• New Hampshire v. Massachusetts, U.S. Supreme
Court Case Docket No. 22O154
– New Hampshire does not have an income tax.
– The State of New Hampshire filed an original complaint in
the U.S. Supreme Court against Massachusetts.
– Challenges imposition of Massachusetts income tax on
employees formerly working in Massachusetts but working
elsewhere (from home) during the pandemic.
12
Litigation of Pandemic Tax Rules
• Buckeye Institute, et al v. Kilgore, Columbus City
Auditor et al., Franklin County Ohio Common Pleas
Court, Case No. 20-CV-4301
– Ohio has a municipal income tax with hundreds of
municipalities imposing the tax.
– The Ohio Legislature provided a safe harbor for employers
to continue to withhold as they had done in the past during
the pandemic.
– Plaintiffs are employer and employees who want to change
withholding to the location of the employees’ residences.
13
Looking Ahead
• Fundamental issues– Federal and/or state legislation is needed
to address likely permanent increases in
teleworking.
– Employers should not expect legislative
relief in the short term.
– Employers and employees do not
necessarily have common interests in
deciding where to withhold.
– Employers need to look ahead despite
lacking certainty.
14
Proposed Federal Legislation
• Two bills are before Congress to provide some
guidance for employees:
– Multi-State Worker Tax Fairness Act of 202 (H.R. 7968), which
would establish a physical presence rule for income tax
purposes.
– Mobile Workforce State Income Tax Simplification Act of
2020 (H.R. 5674), which would create a 30-day safe harbor
for employees who work in other states.
15
Best Practices
• Review state tax profile
• Policies
• Recordkeeping
• Business solutions
16
Review State Tax Profile
• In addition to withholding issues, employers could
incur additional taxes due to WFH employees:
– Examples: Income, franchise, sales and use and even
new foreign taxes.
• Corporate net income or gross receipts taxes
– Nexus: Public Law 86-272 and De Minimis Activity.
▪ In-state agents soliciting sales of tangible personal property
do not create net income tax nexus for principal (employer).
▪ Does not apply to sales of services or digital products; gross
receipts taxes such as the Ohio commercial activity tax.
– Apportionment
17
Review State Tax Profile
• Sales and use taxes
– Post-Wayfair environment:
▪ Physical presence no longer required to establish nexus
o Some states continue to argue that physical
presence also establishes nexus
▪ Economic nexus and marketplace facilitator laws
o Passed in every state except Florida and Missouri
o Will sales tax nexus rules bleed into income tax?
18
Review State Profile
• Ways to trigger nexus:
– Sales
– Employees
– Physical assets
– Marketplace facilitator
– Storage of products
– Miscellaneous affiliates; internet activity including
marketing; “click-through” nexus; warranty repair
• Withholding places employer on the radar
19
Review State Tax Profile
• Unemployment insurance taxes
– Generally, employers only contribute in one state for any
one employee
– Four tests, in order of priority:
▪ Localization of service
▪ Base of operations
▪ Direction or control
▪ Employee’s residence
20
Review State Profile—Unemployment
(con’t)
• Interstate Reciprocal Coverage Arrangement (IRCA)
– For multi-state employees, 45 states have adopted
IRCA. Reciprocity Reciprocal
– Employers may elect to report and pay in one state for
a particular employee, provided that:
▪ (a) services performed, employee residence, or
employer place of business; and
▪ (b) the employer takes steps to obtain approval.
• Note: Tax withholding sourcing rules may differ from
unemployment rules.
21
Employer Policies
• Employers:
– Should consider whether new policies
regarding where employees can work
should be adopted.
– Be prepared to explain policies to
employees and the C Suite.
– Employ mechanisms to track locations
of employees and prepare for ongoing
dispersed workforces.
22
How Can You Use Technology to Help Track Reports and Calculate What Liabilities You May Have?
23
Track Report Calculate Remit
Track
• Ensure employee is in correct work and home
locations – down to the rooftop
24
Track
25
Report
26
Calculate
27
ABC Company, Inc.(ENT)
2000 Ultimate Way
Weston, FL 33312
888-555-1212
Pay Statement
Period Start Date 06/20/2020
Period End Date 06/26/2020
Pay Date 07/02/2020
Document 456454453
Net Pay $881.30
Pay Details
Siegfried Abreu
89 Straight
Cleveland, CA 32349
USA
Employee Number 708213741
SSN XXX-XX-XXXX
Job Sales Representive
Pay Rate $21.1500
Pay Frequency Weekly
Pay Group Salaried - Weekly
Location Columbus, OH
Division SOFT - Software Division
Department SLSMKT - Sales & Marketing
Region CEN - Central
Earnings
Pay Type Hours Pay Rate Current
Bonus-Salary 0.0000 $0.0000 $125.00
Overtime 8.0000 $21.1500 $253.80
Regular Pay 40.0000 $21.1500 $846.00
Total Hours 48.0000
Deductions
Employee Employer
Deduction Based On Pre-Tax Current YTD Current YTD
401(k) Def Comp $1,224.80 Yes $36.74 $36.74 $1.84 $1.84
Vision Plan $0.00 Yes $0.00 $377.00 $0.00 $494.00
Life Insurance $0.00 No $0.00 $2,184.00 $0.00 $2,288.00
PPO Medical $0.00 Yes $0.00 $546.00 $0.00 $650.00
STD $0.00 No $0.00 $0.52 $0.00 $0.00
Add'l Life Ins $0.00 No $0.00 $572.00 $0.00 $617.76
United Way $0.00 No $0.00 $1,000.00 $0.00 $0.00
Taxes
Tax Based On Current YTD
MA State Income Tax $820.62 $37.80 $37.80
Columbiana $125.00 $1.25 $244.61
OH State Income Tax $121.25 $4.24 $622.56
Federal Income Tax $1,188.06 $164.34 $3,069.39
Employee Medicare $1,224.80 $17.76 $370.44
Social Security Employee Tax $1,224.80 $75.93 $1,583.96
WI State Income Tax $246.19 $5.44 $5.44
Paid Time Off Net Pay Distribution
Account Number Account Type Amount
Check amount $881.30
Total $881.30
Remit
28
Employer Recordkeeping
• Time keeping records
– Default working location
– Override work locations
• Employee expense records
• Employee address
• Home
– Work Location
• Tax withholding statuses Income
– Other
29
HR Compliance Considerations for Remote
Employees
By the end of 2021, over half of the U.S.
workforce may work remotely multiple days of the
week.
30
Evolve your
onboarding
capabilities
• Simplify the process
• Digitize documents
• Standardize the
process and offer
individualized
support.
Focus on tax
withholding based
on ee’s remote
locations
• Consider regular
auditing of ee’s
remote work locations
• Stay on top of ever-
changing regulations
Ensure timely
delivery of HR
compliance forms
to employee’s
• Provide timely
electronic delivery of
new policy and HR
compliance forms
(i.e. tax and ACA
statements)
Focus on user
experience while
providing secure
platforms
• Offer official
security guidance
to your remote
employee’s
Business Solutions
• Employ the reciprocity agreements if applicable
and comply with the required documentation.
– This seems like the best solution at this time.
• Consider conforming to COVID-19 safe harbors.
• Track legislation and tax agency announcements.
• Examine all implications of a policy for withholding
and consider announcing a policy.
• Consider implementing a system to track
employees.
31
Contact for Questions
32
Matt HunsakerLeader of the State and
Local Tax Team
BakerHostetler
T +1.214.210.1214
Ted BernertPartner
BakerHostetler
T+1.614.462.2687
Dave EbersoleAssociate
BakerHostetler
T +1.614.462.2652
Liz BuckoSenior Director
Compliance Products
UKG
T +1 404 312 2765
Mike SemesOf Counsel
BakerHostetler
T +1.215.564.8270
For questions regarding CLE and CPE credit, please contact [email protected].
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bakerlaw.comThese materials have been prepared by Baker & Hostetler LLP for informational purposes only and are not legal advice. The information is not intended to create, and receipt of it does not constitute,
a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. You should consult a lawyer for individual advice regarding your own situation.
