Editor: Mark Heroux, J.D.
Being an employer comes with its own compliance requirements and challenges in normal day-to-day operations. This year has certainly added to those compliance requirements in light of COVID-19. Faced with stay-at-home orders, plummeting demand for their products and services, and general economic uncertainty, many businesses were forced to lay off significant portions or all of their workforce. Many employers found themselves juggling payroll tax payments and return due dates to free up cash flow. Others struggled with trying to maintain and manage their workforce by having employees work remotely, some with limited information technology and resources — and from their kitchen tables or living rooms.
Employer individual income tax withholding
Businesses with employees working from different locations than before the stay-at-home orders (i.e., employee's state of residency, parent's state of residency, second home, etc.) should first be aware that states generally have different thresholds of activity for registering and withholding employee individual income taxes. Wages are often subject to employer withholding in the state where they are actually earned. A handful of states are accommodating and do not require registration and withholding until an employee has been working there for 30 days or more; others require withholding from the first day wages are earned. The vast majority of states use periods that vary from two to 29 days, or after the employee meets enumerated earned income thresholds.
However, states with reciprocity agreements are an exception to the general rule. Reciprocity agreements commonly require an employer to register and remit individual income tax withholding to the employee's state of residency even if all work performed by the employee is in the reciprocal state. But if an employee earns wages at a business location outside his or her state of residence and no reciprocity agreement exists, then the employer ordinarily would need to withhold for the state where the employee's services were performed and the wages were earned.
State COVID-19 employer individual income tax withholding relief
Since employer wage withholding is a trustee tax, i.e., the taxes are collected by the business and held in trust for the state until remitted, extensions for filing or payment are not allowed by most states. However, some states did allow extensions of time to file and/or pay employee withholding, including Michigan (Michigan Department of Treasury, "COVID-19 Updates for Withholding Tax," available at www.michigan.gov) and Iowa (Iowa Department of Revenue Order 2020-01).
The vast majority of states have not addressed exceptions to the normal withholding requirements due to COVID-19 as applied to employees temporarily working in a new location. A few have released guidance that likely provides relief to employers in this situation. For example, both Alabama and Georgia have stated that if an employee is working temporarily in a different location due to COVID-19, the wages should be sourced based on where the employee's normal work location was prior to the state of emergency (see Ga. Department of Revenue Coronavirus Tax Relief FAQs, available at dor.georgia.gov). For Alabama, the relief only applies to employees working remotely during the federally declared period of emergency (Ala. Department of Revenue Coronavirus Updates, May 12, 2020, available at revenue.alabama.gov).
It is important that businesses following these and similar exceptions are aware of the periods for which the exceptions are allowed. If employees continue to work remotely from a different state beyond the periods covered under those exceptions, the business will most likely be subject to employer withholding requirements in the employee's temporary state of work.
A number of states allowed an extension of time for employer payments for unemployment insurance. Most states did not also allow an extension to file returns. Employers should ensure that they strictly adhere to filing due dates even if there was an extension to pay in their state. Maryland allowed an extension to pay but not to file for the first quarter. Wisconsin offered a deferral for employers with a first-quarter tax liability of at least $1,000. Employers will still need to pay 40% on time but can spread the remaining 60% throughout the year. These are just a couple of illustrative examples, as states have varied significantly on the types of relief offered to employers.
In these times of economic strain and uncertainty, business are likely wondering if their experience rating for unemployment insurance will go up due to claims filed by employees during the coronavirus pandemic. Many states have consistently said that claims filed due to COVID-19 will not count toward the employer rating determination. However, businesses could see an increase across all employer ratings in the future to replenish state unemployment insurance trust accounts.
The WARN Act
Employers that needed to reduce or furlough workers should be aware of reporting requirements under the Worker Adjustment and Retraining Notification (WARN) Act, P.L. 100-379. This federal law requires employers with 100 or more full-time employees with at least six months on the job to provide written notice 60 days or more prior to (1) a plant closing (the temporary or permanent closing of a business site or a facility or operating unit within it) that results in an employment loss by at least 50 full-time employees within a 30-day period; or (2) a "mass layoff" that results in employment loss within a 30-day period at a single site by either (a) 50 to 499 full-time employees who constitute at least 33% of the site's workforce, or (b) 500 or more full-time employees. There are limited exceptions to the reporting requirements, including unforeseeable circumstances, natural disasters, etc. When applicable, the employer is still required to give notice as soon as possible.
While many states' requirements follow the federal requirements, not all do. Businesses should be aware that a number of states, including California, Illinois, New Jersey, and New York, have their own versions of the WARN Act. For example, California's version, the Cal-WARN Act, does not have an exception from the reporting requirement for unforeseeable circumstances, but the governor of California has suspended certain notification requirements under the Cal-WARN Act due to the pandemic.
Remote employees and nexus for other business taxes
If a business had employees working in different states due to COVID-19, does the business establish nexus for another tax type, which will now require registration, filings, or other compliance?
Under normal circumstances, having an employee working in a state would likely establish nexus for sales as well as income tax purposes. Some states have acknowledged the unprecedented circumstances that were largely out of employers' hands and extended an exception in light of COVID-19. These exceptions may vary from state to state, by tax type, and by duration.
The Rhode Island Division of Taxation issued guidance (Advisory for Tax Professionals ADV 2020-24 (May 28, 2020)) that employees working from home for the duration of Rhode Island's state of emergency will not establish nexus for sales and use or corporate income tax purposes. New Jersey has also stated that having employees working in the state due to COVID-19 will not establish nexus for corporate income tax or sales tax purposes (N.J. Division of Taxation, "Telecommuter COVID-19 Employer and Employee FAQ," available at www.state.nj.us). Employers that rely on these exceptions to additional tax filings for teleworking employees must monitor the dates of declared state-of-emergency orders to ensure proper compliance.
Mark Heroux, J.D., is a tax principal and leader of the Tax Advocacy and Controversy Services practice at Baker Tilly US, LLP in Chicago.
For additional information about these items, contact Mr. Heroux at 312-729-8005 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Baker Tilly US, LLP.