Pandemic teleworking causes state tax withholding issues
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Pandemic teleworking causes state tax withholding issues

2 years ago · 3 min read · AICPA Insights Blog

A half-century ago, tax withholding was one of the simpler issues for taxpayers and practitioners. A more mobile society makes state tax withholding more complicated today given the ease of conducting cross-jurisdictional business and the increase in teleworking or remote work arrangements.

Meanwhile, the web of inconsistent state and local income tax and withholding rules affect employees and employers. As the AICPA testified, the myriad state income tax withholding laws and varying de minimis exceptions make compliance difficult and time-consuming.

In the wake of the coronavirus pandemic, more employees are teleworking, and state income tax withholding is a larger burden on employers.

Pandemic telework state tax issues

Determining the jurisdiction where an employee owes state and local taxes has become complicated as work arrangements have changed drastically during the pandemic. In addition to owing income taxes in an employee’s state of residency, without specific relief, the employee may also owe income taxes in any jurisdiction where they may have worked.

The employee and employer may need to track all of the employee’s working locations. While some states issued guidance on withholding during the pandemic, that guidance has not been uniform or widely adopted. Additionally, whether a state has a reciprocity agreement may further affect withholding.

Regardless of reciprocity or pandemic guidance, employees may still have a state and local tax obligation, even if employers are not required to withhold.

Some states adopt AICPA recommendations

To address concerns with state income tax withholding during the pandemic, the AICPA developed recommendations for state CPA societies that want to advocate at the state level. Specifically, the AICPA suggested states allow businesses to continue to withhold income tax (and the employee income tax liability) based on the location of the employer for newly telecommuting workers instead of the employee’s location.

Using the location of the employer would help prevent a double tax when one state uses the convenience of employer test (AR, CT, DE, NE, NY and PA) to source wage payments and another state uses the physical presence standard. It’s possible that a resident’s state credit for taxes paid to another state may not cover all the nonresident state taxes paid.

The AICPA suggested state and local jurisdictions:

  • Allow businesses to continue to withhold income tax in the state where an employer is located.

  • Allow the employee who is temporarily telecommuting to continue to pay tax to the state where employer is located.

Thirteen states (AL, GA, IL, IN, MA, MD, MN, MS, NE, NJ, PA, RI and SC) have followed our suggestion in providing guidance. We hope more states will follow with similar guidance.

In addition, 13 states (AL, GA, IA, IN, MA, MD, MN, MS, ND, NJ, PA, RI and SC), DC and Philadelphia followed AICPA’s recommendation (for state CPA societies to advocate) that an employee working remotely in a state due to restrictions would not create nexus and apportionment for tax purposes. Additionally, five states (GA, IN, IA, MA and RI) have provided that newly remote workers (because of COVID-19) will not count against companies taking P.L. 86-272 positions.

Federal legislation

To address this issue on a national level, the AICPA supports federal bipartisan legislation, S. 3995, the Remote and Mobile Worker Relief Act of 2020. The bill provides uniformity for nonresident state and local income tax withholding, and a reasonable de minimis exception from the assessment of state and local income tax in a jurisdiction in which an employee doesn’t reside.

The bill also provides businesses a framework to address the numerous state and local tax issues that have unavoidably arisen because of the changing location of employees during the coronavirus pandemic. With the increase of employees working remotely during the pandemic, the AICPA urged Congress to enact the legislation as soon as possible to ease our country’s nonresident state income tax withholding and compliance burdens.

Federal withholding issues and AICPA advocacy

The AICPA has worked on federal withholding issues as well. Over the past few years, taxpayers and practitioners faced challenges with the elimination of personal exemptions in the Tax Cuts and Jobs Act (TCJA). This change has complicated federal withholding on the new 2020 Form W-4 resulting in the IRS tax withholding estimator and FAQs. Many taxpayers did not have enough federal withholding for the 2019 tax year.

The AICPA provided feedback on the draft 2019 Form W-4, Employee’s Withholding Certificate, and urged the IRS to provide penalty relief for estimated taxes. The AICPA also supported federal legislation, the Taxpayer Penalty Protection Act of 2019 (H.R. 1300), that would have provided additional penalty relief.

With the pandemic and the July 15 filing and payment deadline, many taxpayers and tax preparers continued to struggle to calculate and pay tax payments and prepare and file tax returns.

In early July, the AICPA advocated for further IRS tax administrative and penalty relief:

  • To automatically waive the failure to file and failure to pay penalties for the millions of taxpayers affected and working through the challenges the pandemic created.

  • To provide an expedited process to help taxpayers establish or revise an installment agreement based on current financial circumstances to comply with their tax obligations.

  • To delay collections activities at least 90 days after July 15, 2020.

The AICPA continues to track state tax guidance and to advocate on various issues related to the coronavirus pandemic. We will keep you updated as developments occur.

Eileen Sherr, CPA, CGMA, M.T.

Eileen Sherr is a Director – Tax Policy & Advocacy of the Association of International Certified Professional Accountants (the Association, also includes and referred to as AICPA) in Washington, DC.

She assists in the development and implementation of the Association’s tax policy and advocacy, including the formulation, review, and submission to Congress, Treasury, and the IRS of tax technical and policy recommendations. She also plays a key role in the development of the Association’s testimony for tax-related Congressional hearings. She also represents the Association with various tax related organizations, including the American College of Trust and Estate Council (ACTEC), American Bankers Association Trust Tax Committee, and Tax Executives Institute.

Ms. Sherr staffs the Association’s Trust, Estate, and Gift Tax Technical Resource Panel and its Foreign Trust Task Force; writes and presents on emerging tax legislative and regulatory issues; and interacts with government officials, other organizations, and the media.

Ms. Sherr obtained her Master of Taxation degree and Bachelors of Accountancy degree from The George Washington University. She is a Certified Public Accountant (CPA) and has earned her Chartered Global Management Accountant (CGMA) designation.

Ms. Sherr is a frequent speaker at national and state CPA society tax conferences and webcasts. Ms. Sherr has authored articles in The Tax Adviser, Journal of Accountancy, Journal of Accountancy Online, CPA Letter Daily, Practicing CPA, and Practical Accountant; has written blogs for AICPA Insights; has recorded podcasts, webcasts, and videos for the AICPA website; has been interviewed on CNN, Fox Business News, and Scripps; and has been quoted in the Wall Street Journal, Washington Post, Forbes, Reuters, CBS News, CNBC.com, San Francisco Chronicle, Chicago Tribune, The Hill, Politico, Law360, CFODive.com, Checkpoint Newstand, Tax Notes Today, Bloomberg BNA, BNA Daily Tax Reports, CCH Tax Day, CCH Federal Tax Weekly, Accounting Today, WEBCPA, Marketwatch, NerdWallet, NYSSCPA Trusted Professional, and the Rockville Gazette.

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