Months into the COVID-19 pandemic, many employer telecommuting arrangements remain in place, with several large corporations opting to extend these arrangements well into 2021. The benefits of such arrangements have been clear for many employers during the pandemic, including that they permit continued productivity while keeping employees safe. However, the longer that employees remain out of the office, the more telecommuting-related issues arise, including with respect to taxation of employee income and leave requirements, which we discuss below.
Tax Implications of an Employee Working Remotely Due to the COVID-19 Pandemic
As a general rule, employees pay income tax in the state in which they perform services for an employer. For example, if a teleworking employee lives and works entirely in New Jersey despite the fact that her employer is located in Florida, the worker’s income tax would be withheld according to New Jersey law and paid to the State of New Jersey. Many states have reciprocal agreements with one another on the treatment of taxes when an employee works in one state and lives in another. Two neighboring states will agree that an employee who works in State A can pay income tax in their home State B, allowing the employee to file one tax return each year. In the absence of tax reciprocity agreements between neighboring states, employees may be subject to income taxes in two states (for example, New York and New Jersey). With masses of employees teleworking in a different state from their typical work arrangement, where the employee should pay income taxes becomes increasingly complicated.
Some states have addressed this issue and other business-related tax implications caused by COVID-19. For example, on October 22, 2020, Massachusetts adopted a personal income tax rule which states that employers must source compensation to Massachusetts (and therefore withhold income tax) for personal services performed by a non-resident who: (1) immediately before the Massachusetts COVID-19 emergency, was an employee engaged in performing those services in the state; and (2) who is performing those services from a location outside the state due to pandemic-related circumstances. Massachusetts will also provide a credit for income taxes paid to another state by residents who performed work outside of Massachusetts immediately before the COVID-19 pandemic and who began working in Massachusetts because of the COVID-19 pandemic. The final rule applies to income from employee services performed beginning March 10, 2020 through the earlier of December 31, 2020, or 90 days after Governor Baker gives notice that the state of emergency is no longer in effect. Notably, Governor Chris Sununu of New Hampshire instructed the New Hampshire Department of Justice to file a lawsuit in the U.S. Supreme Court challenging the Massachusetts Department of Revenue’s rule on imposing Massachusetts income tax on New Hampshire residents working from home.
New Jersey similarly issued FAQ’s addressing telecommuting tax implications. The state’s Division of Taxation waived the “nexus-creating” impact on out-of-state businesses with employees currently working in New Jersey as a result of COVID-19. The Washington D.C. Office of Tax and Revenue published similar information stating that it will not impose a corporate franchise tax nexus on employers because employees are telecommuting during the public emergency caused by COVID-19.
In the absence of guidance from each state on remote work tax implications, employers are encouraged to consult legal counsel or their accountants on how out-of-state remote workers impact company tax obligations.
Leave Law Implications of Employee Remote Working
It was hard enough before the pandemic started to untangle the complex web of leave entitlements that may apply to an employer’s workforce in different states. This web of leave laws becomes even more complicated however, when employees telecommuting in a different state from which they typically work begin to impact the employee’s eligibility for local leave.
For example, how does an employee who regularly works in New York City but is now working remotely from New Jersey accrue sick leave? Is the employee entitled to New York City Sick and Safe Time and/or New Jersey Sick Leave? Ultimately (and absent additional guidance) the answer will depend on the eligibility requirements of the leave, and the specifics of the employee’s work history.
In this scenario, New Jersey’s FAQs on sick time provides that “a telecommuter who routinely performs some work in New Jersey is entitled to full earned sick leave covered under [New Jersey’s] Earned Sick Leave Law so long as the employee’s base of operations or the place from which such work is directed and controlled is in New Jersey.” Based on this guidance, would an employee who typically works in New York City, but who is currently telecommuting in New Jersey as a result of the pandemic be entitled to sick leave under New Jersey law? As the pandemic, and in turn this telecommuting arrangement, continues, at what point does the employee’s base of operations shift to New Jersey requiring the employer to provide sick leave?
At the same time, would this employee still be entitled to accrue sick leave under New York City’s law (and New York State’s new law, discussed in our previous post)? New York City’s law, which was recently amended, has interpretive guidance (applicable under the old law) stating that an employee only accrues sick leave under the New York City law when they perform services in New York City. If they are subject to a temporary telecommuting arrangement, do they lose eligibility to accrue New York City sick leave? Will New York City update its guidance to address this issue? Will New York State issue guidance under its new law to address this issue as well? Employers should also be mindful that employees may be able to maintain multiple accruals depending on where they perform services.
In Massachusetts, the state has thankfully clarified how to treat employee eligibility for the Massachusetts Paid Family and Medical Leave Act. Employers and employees began contributing to the Commonwealth’s trust for paid family and medical leave benefits back in 2019, and most leave entitlements will become available in a few short months on January 1, 2021 (see our blog posts on preparing for Massachusetts Paid Family and Medical Leave here and here). However, many employees regularly working in Massachusetts commute in from neighboring states including Rhode Island and New Hampshire. With such employees now living and teleworking outside of Massachusetts, should employers still deduct contributions from employee paychecks? Fortunately, the Massachusetts DOR addressed this issue in a Technical Information Release: An employee who previously performed services outside of Massachusetts and was not subject to PFML will not become subject to PFML solely because the employee is temporarily working from home in Massachusetts. Likewise, an employee who previously performed services in Massachusetts but is temporarily working from home outside of Massachusetts solely due to COVID-19 continues to be subject to the PFML rules. However, if employers decide to extend teleworking arrangements beyond the pandemic, this guidance will no longer apply. Employers will need to determine if and when an employee becomes subject to (or is no longer subject to) Massachusetts Paid Family and Medical Leave.
Employers may be able to conduct a quick analysis to determine whether an employee is or is not entitled to a certain leave benefit while COVID-19 state of emergencies remain in place in many states. However, if long-term telecommuting arrangements become the norm after the pandemic ends, employers must reevaluate applicable leave policies to ensure they align with their new remote workforce.
As the last several months of telecommuting has taught us, working from home can have both benefits and drawbacks. Employers are encouraged to consult with counsel before making tax and leave-related decisions that impact employees, as they relate to remote working during the COVID-19 pandemic.