Pandemic work-from-home agreements have tax and labor law penalties Pillsbury Winthrop Shaw Pittman LLP

Resolving jurisdiction issues for tax purposes can be complicated: As explained in this recent article by Pillsbury partner Michael Kosnitzky, the rules vary as to which state has the right to change the income of workers who work from home for employers in another State work, tax. Most state labor laws make it clear that non-state employers must comply with state legal obligations in the jurisdictions where their remote employees are physically located.

In addition, employers with employees who work in other states can adopt requirements for foreign company registration. For example, Illinois employers must register with the Illinois Department of the Treasury (IDOR) and withhold Illinois state taxes if the employer has an employee who works in Illinois for more than 30 days. The director of IDOR announced that the department will waive penalties and interest against non-state employers if the "only reason" for withholding tax is because the employee is working from home due to the COVID-19 pandemic, but the The claim itself still applies. Towards the end of the 2020 tax year, employers who are aware of employees who temporarily moved to other jurisdictions during the pandemic should consider complying with the laws of the jurisdictions where their employees are rooting out the pandemic.

Using the examples of employers in the District of Columbia and New York City, this Customer Alert describes the types of legal and tax compliance issues employers are addressing as a result of these continued remote working arrangements in relation to employees working from home in the neighboring jurisdictions of Virginia have to. Maryland, New Jersey or Connecticut.

DC employers with employees in Virginia and Maryland

Effects on income tax for employers and employees

DC employers' withholding tax requirements should not be affected by Virginia and Maryland residents moving to teleworking status as a result of DC's Maryland and Virginia reciprocal agreements that give employees state in the state in which they are resident Pay income tax, not where they work. For example, a DC employee residing in Maryland would pay Maryland state income tax, not DC income tax, regardless of whether the employee worked remotely or in the office. In response to an increase in remote working due to COVID-19, the Office of the Comptroller of Maryland issued guidelines on withholding questions. The guidelines explain that Maryland state income tax and withholding tax apply to Maryland residents and non-Maryland residents receiving Maryland income, unless Maryland has a mutual agreement with residents of DC, Virginia, and West Virginia Has.

If DC company employees have temporarily relocated to work in any country other than DC, Virginia, or Maryland, the employer should consult the applicable jurisdiction's tax law definitions. Whether the employee has become resident in another jurisdiction for state income tax purposes may depend on how long the employee has lived in the state, whether the employee has another home, whether the employee intends to return to another country. and other factors. Residence exams under state law vary significantly, so there is no substitute for consulting the specific guidelines of each jurisdiction.

Company registration requirements

DC employers should be aware of the registration requirements for businesses in Virginia and Maryland. Both suggest that DC employers with remote workers in Virginia and Maryland should register as employers in those states.

Under Virginia law, a DC employer should register as an employer if an employee is working remotely in Virginia. Virginia law imposes an income tax on "Virginia taxable income for each taxable year of … any foreign corporation that has Virginia source income." The Virginia Tax Commissioner is of the opinion that "(g) a company will generally receive income from sources in Virginia when there is sufficient business in Virginia to make one or more of the applicable allocation factors positive." According to this Virginia Revenue Ruling A foreign corporation is subject to state withholding tax because one Virginia employee provides services from home because the activities of one Virginia corporation's employee are sufficient to make the Virginia corporation context for income tax purposes. The guidelines do not provide a clear test of when an employee is providing services from home when the employee also has an office on the employer's premises (even if it is not in use).

While the Maryland law is less clear-cut, DC employers with employees working out of Maryland should consider registering as Maryland businesses. If a company has sufficient presence in Maryland, it must register with the Maryland Comptroller & # 39; s Office. The Maryland Interstate Commerce Tax Act (PL 86-272) contains examples of state activities that make a connection, including “(m) maintaining a business location in Maryland, including any type of office” and “(e) recruiting and Accept orders in Maryland. “However, the examples in the statute are not intended to be exhaustive, and the Comptroller's Office has not provided any additional guidance on whether a foreign employer employing Maryland workers remotely should register as a Maryland worker.

Employers are generally cautious about registering as an overseas company in a state where an employee works from a home office if the employee is qualified as a resident of that state.

New York employer with remote workers from New Jersey and Connecticut

Effects on income tax

Unlike DC, New York follows the Convenience of the Employer test, which requires an employee with income from New York sources to owe New York state taxes even if they are not a resident, other than work days on which the employee is required by the employer to work outside of the state (e.g. not just as a convenience to the employer or employee).

In its most recent guidance, the New York Department of Taxation and Finance has taken an aggressive stance, stating that a non-resident whose head office is in New York state will work in New York state on days the employee is teleworking from outside the state during the pandemic, unless the employer has set up a "bona fide employer office" at the teleworking site. While the "good faith employers office" test is based on a number of factors, the New York State Guidelines state that New York State income tax will continue to apply unless an employer has specifically acted to establish a bona fide teleworking office Set up by the employee.

Company registration requirements

While the New Jersey Division of Taxation typically requires that a non-governmental corporation that allows or requires employees to work from their New Jersey homes register as a New Jersey company and pay New Jersey Corporation business tax, the division announced in the spring that the presence of employees working from home in New Jersey would not be considered an adequate context for non-state corporations if those employees were only due to closings due to COVID-19 and the employer's social distancing work from home politics.

In addition, in New Jersey, a remote seller who makes a retail sale of tangible personal property, certain digital products, or services supplied to New Jersey must register, collect, and remit New Jersey sales tax. However, during the pandemic, New Jersey's tax authorities temporarily waived the “Sales Tax Nexus Standard” that is generally followed when an out of state seller employs an employee in the state. According to the division, “as long as the seller has had no physical presence outside of state other than employees working from home in New Jersey and below the established economic thresholds (ie, gross income from sales made in New Jersey during the sale The current or previous calendar year is $ 100,000 or less, or the company has 200 or fewer separate transactions in New Jersey in the current or previous calendar year. The Division will not assume the seller has any connection for sales tax purposes outside of the state. ”

Under Connecticut law, a company has adequate business ties with the state – and must register for Connecticut corporation tax – when engaging in activities including "maintaining an office or compensating its employee for the use of their home, if that employee from there works home ”and“ execute or obtain orders for services ”within the state.

Labor compensation insurance

Since an employee's injury or illness can be compensated within the framework of employee compensation if it arises from and in the course of employment, remote employees are insured in employee compensation insurance. Therefore, employers in DC and New York should ensure that workers' compensation insurance covers the jurisdictions where remote workers work.

Since employers are also responsible for providing the same safe work environment for those who work remotely, employers should also establish a remote work policy that sets out what is expected of remote work, including guidelines for maintaining a safe, designated work area, to reduce the risk of injury.

unemployment insurance

Since entitlement to unemployment insurance benefits usually depends on the physical presence of the employee, the employer must register for and pay unemployment insurance premiums in that state in order for an employee to work regularly in another state. Accordingly, employers in DC and New York should keep a record of all remote worker locations and ensure that unemployment insurance premiums are paid in those states.

State labor laws

Many states and municipalities have labor laws in place that apply to all employees working in that jurisdiction. These laws may contain wage and hourly laws that affect the minimum wage or the minimum wage for exemption from overtime, rest and meal breaks. Laws for paid or unpaid leave; other compulsory benefits (e.g. temporary disability insurance); or recall rights after a vacation. Some of these laws also require employers to inform workers in the jurisdiction of their rights.

Accordingly, employers must ensure that they know and comply with labor laws in all jurisdictions where an employee works remotely. For example, the California courts have ruled that California overtime laws apply to non-resident employees of a California company who work “full days and weeks” in California, as explained in this July 7, 2011 Client Alert. Employers would be well advised to consult with the employment advisor about each state in which the employer has remote workers to determine what state laws apply to when a person resides in or is otherwise subject to state labor laws, and what labor laws apply in the state to apply to the employer. Employers who are wondering whether they should make tax payments in other countries should also contact the tax advisor on these questions and may want to claim a refund after receipt of payment.