- During the COVID crisis in 2020-2021, remote work became commonplace, and afterward, businesses continued this remote employee trend.
- While the momentum toward remote work seems to have slowed, states have continued to respond to the tax implications of a remote and mobile workforce.
- This article will review the basic tax principles around the mobile and remote workforce and consider some recent developments.
Background
When COVID swept the country in 2020, much of the workforce that could work from home or otherwise working remotely did so, as businesses were forced, either by government action or their own risk management policies, to close their offices. Remote employees had existed before this time, of course, but the practice exploded during COVID and many businesses embraced a remote work model, in whole or in part, after the pandemic subsided. The pendulum seems to have started to swing the other way against remote work; nonetheless, the tax implications of remote and mobile employees are a constant consideration for employers.
Basic Considerations
There are two main things to consider when an employee either has an employee working remotely in a state, or an employee traveling on business to a state. The first is nexus – whether the employee’s presence in a state creates a taxable presence for a host of tax purposes for their employer. The second is withholding – does the employee’s presence in a state create an employer responsibility to withhold income taxes on their earnings in a state. States may have provided special dispensation during the pandemic protecting employers from nexus or withholding considerations; these have all expired and employers can no longer rely on COVID-related exceptions from these rules.
Nexus
Nexus is a broad term that is used in state tax that refers to the threshold of activity that a business can conduct in a state before its activities have tax implications, such as liability for income taxes or a responsibility to collect and remit sales taxes. This activity can take the form of the presence of employees in the state, owning or leasing real or tangible personal property in the state, or directing sufficient economic activity toward a state (usually resulting in sales exceeding a certain dollar threshold) that results in a taxable presence for the business.
Forvis Mazars Insight: Nexus is a complicated and technical area; the rules can vary from state to state and from tax to tax. Businesses whose geographic footprint has expanded without considering nexus should consider undertaking a formal nexus study. Even those businesses who have completed such a study should consider refreshing periodically to address changes in the business’ geography, as well as potential changes in the rules that could impact the business.
Payroll Withholding
The more nuanced issue, and the area that has seen some recent developments, is when an employee’s work in a state (broadly defined as the employee performing services on behalf of an employer within that state) gives rise to an employer’s responsibility to withhold taxes from that employee’s wages. Such withholding could include state income taxes as well as any local income taxes that may apply.
As a threshold matter, individuals are generally subject to tax on all their income in the state of their residence. Other states can only tax the income of nonresidents to the extent that the income is from sources in that state. Wages earned from the performance of services within a nonresident state are generally subject to tax in that state. Employees who are subject to tax in other states may be entitled to a tax credit in the state of their residency for taxes paid to other jurisdictions, but it may not be dollar for dollar depending on, among other things, the rate of tax in the other state compared to the state of the employee’s residence.
There are three general approaches that a state may take in using thresholds for determining when an employer has withholding responsibilities. The first approach is “day one, dollar one” withholding – these states require an employer to withhold the minute a mobile employee performs services on behalf of their employer within the state. The second approach is requiring withholding for employees who work more than a certain number of days within the state – the exact number of days can vary from state to state. The final method is requiring withholding once wages sourced to the state (those earned while performing services in the state) exceed a certain threshold.
Several states have recently enacted changes increasing the number of days in the safe harbor before withholding is required. Effective for 2024 and thereafter, Indiana Senate Bill 419 expanded its safe harbor to thirty days – non-resident employee compensation for work performed in Indiana for less than thirty days is exempt from Indiana tax, and employers are not required to withhold wages from someone who works less than thirty days in-state. Nonresident employees exceeding this threshold are subject to tax on all their Indiana-sourced income, including the first thirty-day period, and employers are required to likewise account for all wages, including the first thirty days, in their withholding. This rule does not apply to local income tax withholding requirements in Indiana. Additionally, this rule does not apply to professional athletes, entertainers, public figures who are compensated for appearances on a per-event basis, or for any employees who become Indiana residents during the taxable year.
Montana, likewise, enacted similar legislation, also effective January 1, 2024, providing for a thirty-day safe harbor. Like Indiana, once the thirty-day period is exceeded, all the non-resident’s Montana-sourced income is taxable, including the first thirty days. This provision does not apply to professional athletes or entertainers, public figures compensated on a per-event basis, “key employees” – those whose compensation exceeded $500,000 in the previous tax year, certain construction employees, and employees performing production activities of any nature.
Forvis Mazars Insight: As with nexus determinations, employer withholding obligations (and, by extension, the income tax filing obligations of employees) can be complicated, with states applying a host of different rules. Employers who have not considered this may want to conduct a study as to where they should be withholding taxes on their employees; employees should evaluate their tax filing obligations as well.
Convenience of the Employer
An additional complication for both employers and employees is the controversial “convenience of the employer” rule. At a high level, the convenience rule starts with an inquiry behind the reason for an employee’s remote work. True business travel, such as attending client meetings or attending to other needs of the employer, are treated as days that are worked in the state of travel. However, an employee working out of state for their own convenience, rather than for the convenience of the employer – as in a typical work from home situation – will be deemed to have worked from the location of his assigned office rather than working from home (or other alternative work location) for purposes of sourcing that income in states applying the convenience of the employer rule.
A handful of states, most notably New York State, but including Delaware and Pennsylvania (plus the City of Philadelphia) apply the convenience doctrine. Additionally, two states – Connecticut and New Jersey – use a retaliatory convenience rule, whereby they will apply the doctrine to nonresident employees working in the state if the state of their residence uses the convenience of the employer rule.
The constitutionality of this doctrine has been challenged by a professor at a New York-based law school who worked from home in Connecticut regularly. He lost his first challenge to the doctrine in the early 2000’s. He brought another challenge based upon the COVID restrictions in New York State, whereby he was unable to work from the law school because of emergency restrictions placed upon non-essential workers by the Governor. The professor sought a refund from the Division of Taxation, which was denied based on the convenience of the employer doctrine. The Division ruled that he was working from home for his own convenience rather than on an assignment from his employer, even though he could not access his office because the school was closed. The Tax Appeals Tribunal affirmed this decision in Matter of Zelinsky, DTA Nos. 830517 & 830681 (N.Y.S. Tax App. Trib. May 15, 2025). Professor Zelinsky has appealed the Tax Appeals Tribunal decision.
Forvis Mazars Insight: Employers having offices in convenience jurisdictions with employees working remotely either part or full time need to carefully consider the impact of this doctrine on their withholding responsibilities, especially for employees putatively based out of an office in a convenience jurisdiction but who work elsewhere on any basis. Likewise, employees may not be entitled to a credit for taxes paid to a convenience state where they work by the state where they are a resident. The impact of this doctrine can be complex and requires careful consideration and planning.
Other Considerations
Remote and mobile employees can implicate other issues for employers. An employee’s travel, or a switch from in-office to remote work, can mean a change in the appropriate state for which an employer should remit state unemployment insurance on behalf of that employee under the four-part test applicable to such payments. There may also be state-level family and medical leave act considerations as well as other labor law issues. It will be important to consult with human resources and legal professionals in order to fully understand the non-tax ramifications of such arrangements.
How Forvis Mazars Can Help
We can help employers evaluate your nexus and withholding footprints if you have not done so or refresh this analysis if it is a little dated. We can also help employees understand their tax obligations because of working remotely or traveling periodically.