With many employees now telecommuting due to the COVID-19 outbreak, employers could face additional state income tax withholding requirements if their employees telecommute from a different state than the one in which they typically work. However, a few states are starting to announce temporary withholding relief in response to the COVID-19 outbreak.
Forty-one states impose a personal income tax on wage income. States typically require an employer that transacts business in the state to withhold personal income tax from wages earned by an employee that is either a resident of the state or a nonresident that performs services in the state (although some neighboring states have reciprocity agreements that require withholding only in the employee’s state of residence). However, as a result of COVID-19, employers that previously had no withholding requirement in a state (e.g., because they did not transact business in the state) may find themselves subject to a withholding requirement due to employees working remotely. The issue is further compounded by local income tax withholding requirements.
Fortunately, a few states are starting to provide relief. For example, the Mississippi Department of Revenue issued guidance that it will not impose any new withholding requirements as a result of a telecommuting employee’s temporary work location during the COVID-19 health crisis.
In addition, Ohio’s COVID-19 relief legislation (signed into law on March 27, 2020) includes a provision addressing the state’s municipal income tax withholding requirements. From March 9, 2020 until 30 days after the Governor rescinds his emergency declaration order, any day an employee telecommutes from a municipality will not count towards the minimum day count that triggers the municipality’s income tax and the corresponding employer withholding requirement. Instead, the state will consider the telecommuting employees to be working at their principal place of work rather than their telecommute location.
The Michigan Department of Revenue recently issued local income tax guidance that takes a different approach from Ohio’s legislation. The Department concluded that an employee is not subject to a Michigan city’s income tax on wages earned while the employee works from home outside the city. For example, employees that typically work in Lansing, Michigan, but are now telecommuting from their homes outside the city, will not be subject to Lansing’s income tax on wages earned while telecommuting. Employees will need to allocate their wages between days the employee physically works in the city (these wages are subject to the city’s income tax) and days where the employee telecommutes from outside of the city (these wages are not subject to the city’s income tax). Michigan’s approach will reduce local income tax obligations for some employees, but may result in an additional administrative burden. Michigan recommends that employees and their employers maintain work logs of days worked outside of the relevant city because a city tax administrator may later request them when a city income tax return is filed.
Even if a state does not announce specific withholding relief in response to the COVID-19 outbreak, employers may be able to avail themselves of various equitable arguments. Employers should carefully review their state and local withholding requirements, including any relevant state reciprocity agreements, and should continue to monitor state guidance regarding COVID-19 withholding relief. Additionally, employers should be mindful of how these rules could affect their corporate income tax computation – particularly nexus (e.g., does the employee working from home create nexus in the state) and apportionment (e.g., whether the employee working from home will affect a state’s payroll factor).
