The Future of Telecommuting and Employee State Income Tax

Throughout COVID-19, many people transitioned to working online instead of in person. At COVID's height, it was estimated that half of the full-time employees were now conducting their business from home. Since then, many have continued to follow this "new norm" that arose during the pandemic, while others have resumed business as usual. But along with the emergence of this "new norm" came complications for those working virtually over state lines. To ease this stress, special rules were adopted by some states for those working across state lines. However, if telecommuting continues to become more common, then the initial sets of regulations set in place before the pandemic are likely to return. For many businesses, this could lead to some complications in the future.

What about employee state income tax?

Regarding state income tax, the general rule is that the state can collect tax on an employee's earnings if said employee works or lives in the state. Withholding can become complicated if an employee lives in one state and works in another. States maintain the power to collect tax on any income earned by a resident employee, including wages earned from services conducted out of state. If an employee lives and works in the same state, this needn't be an issue, but for those working across state lines, this could lead to a lot of confusion.

What's nexus and how will it affect businesses?

In some cases, an employer might be required to withhold taxes for an employee's resident state, even if the employee does not perform business there. This event is called "nexus," which can be an absolute nightmare for payroll. If an employer conducts business in the state where an employee is working, that employer will have a state tax nexus. The best way to combat the confusion of a nexus is to understand and research the tax rules and obligations of any state involved in an employee's work since each state's laws vary from one to the other.

As some of these temporary rules begin loosening as employees start going back to work, some workers may be affected by working out of state. Employees who continue to work online rather than commute to a brick-and-mortar establishment may find themselves liable for taxes in both the state where they live and the state where the employer is located. To avoid confusion when withholding, both the employee and the employer should be aware of the tax laws in each state.