Pub. 3 2021 Issue 2

M A R C H / A P R I L 2 0 2 1 14 nebraska cpas C O U N S E L O R ’ S C O R N E R BY JEFF SCHAFFART AND NICHOLAS BJORNSON, KOLEY JESSEN CONTINUED REMOTE WORKING MAY RESULT IN UNINTENDED STATE TAX CONSEQUENCES FOR EMPLOYERS Many employees are now at the one-year mark of working from home. As society returns to “normal,” employers should evaluate the potential tax consequences of permitting or requiring employees who live in other states to work from home. States are considering whether a return to “normal work” should also mean a return to “normal” nexus and other taxation rules. The main issues arise when an employee is a resident of one state while the employer’s physical location is in another. This has potential ramifications for income tax withholding; income, sales, and use taxes; and unemployment insurance. Income Tax Withholding Forty-one states impose a personal income tax on wage income, but their rules vary. For example, some states have a 14-day rule stating that if an employee is working in the state for 14 days or less per year, no income tax withholding is due to that state. Other states use dollar thresholds. Others have entered into reciprocity agreements with each other that eliminate income tax withholding requirements. The issue is further compounded by potential local income tax withholding requirements. As a result, the income tax withholding laws of the state in which the employer has its primary place of business must be compared to those of the states and localities where the employer’s employees have their residences. The failure to do so may result in employees, and their employer, being under-withheld in one or more states, with the resulting potential for interest and penalties accruing on the underpayment (or lack of payment). Seven states, including Nebraska, tax people where their office is even if they do not actually work in the state. This is known as the convenience of the employer (COE) rule. The COE rule comes into effect if the employee works from a home in another state out of their own convenience instead of due to the employer’s necessity. For example, an employee who is based out of an office in Nebraska but works out of her home in Iowa is subject to Nebraska state tax on any compensation earned while working from home. Further, the Nebraska Department of Revenue has stated that it won’t change withholding requirements for businesses based on employees’ locations during the pandemic, and that it won’t impose new withholding obligations on businesses. Many other states provided employee withholding relief in response to the pandemic. Massachusetts similarly advised employers to keep withholding taxes for employees who normally work within their jurisdictions but are now temporarily out of state. However, New Hampshire f i led suit with the U.S. Supreme Cour t contending that Massachusetts taxing their residents is unconstitutional. Iowa filed an amicus brief in support of New Hampshire challenging the ability to tax nonresidents’ income while they’ve been working remotely. The outcome of this litigation should be monitored by employers who rely on the COE rule.