Prior to the start of the COVID-19 pandemic, many states had long-standing rules related to telecommuting employees and how taxes related to telecommuting would thereby be handled. As a result of the COVID-19 pandemic, some employees were required to work from home as a matter of public health, safety, and welfare. During this time, some states, like New Jersey, waived tax nexus rules which would have treated the presence of employees working from home as creating sufficient economic nexus for out-of-state corporations. As of October 1, 2021, New Jersey ended their waiver of the nexus rules and reinstated the pre-pandemic corporation business tax nexus standard which treats employees working from home in New Jersey as doing business in the state under the physical presence test. This corporate tax nexus can subject an out-of-state employer to New Jersey corporation business taxes and the filing of a New Jersey corporate tax return.
In addition, the temporary relief offered at the start of the COVID-19 pandemic with regard to employer withholding taxes for telecommuting employees also ended on October 1, 2021. Thus, an employer should source the wages of its employees based on where the services are performed or what location the employee is working from and withhold New Jersey gross income tax from wages.
Employers should also note that the waiver for the standard sales tax nexus no longer applies on or after October 1, 2021. In this case, an out-of-state seller who has an employee working in New Jersey will likely generate sales tax nexus because having an employee who works at a New Jersey location is considered to qualify as having a physical presence in the state.
As states compete for tax revenues, the sourcing rule among states can be conflicting. For example, a person working from home in New Jersey whose primary office is in New York state, will continue to owe New York income tax on income earned while telecommuting unless the employer establishes a bona fide employer office at the employee’s telecommuting location. However, since New Jersey’s temporary relief period for employer withholding ended on October 1, 2021 (which stipulates that the wages of employees working from home in New Jersey should be sourced to New Jersey and requires that taxes be withheld), this may permit both states to tax the same income. This may leave the taxpayer in the middle of the tug-of-war between the two taxing states and uncertainty about whether his or her claim for credit paid to other jurisdictions may be respected.
Prior to the COVID-19 pandemic, neighboring states like New Jersey and Pennsylvania already had a reciprocal personal income tax agreement in place which eliminates wage sourcing issues for telecommuting employees. The agreement is for the employee’s state of employment to refrain from taxing the wages of a resident of the other neighboring state.
Employers will have to monitor the remote work location of their employees to ensure the various state nexuses for income, employment, and sales taxes are addressed properly.
For questions about tax related to telecommuting in the COVID-19 era, please contact your Untracht Early advisor.