Businesses with cross-border commuters have some unique factors to consider given how the pandemic has changed employees’ work arrangements. ADP’s VP of Government Relations, Pete Isberg, helps to clear up confusion around tax compliance during COVID-19.
Our country’s COVID-19 crisis has raised unprecedented threats not only to public health, but also to our nation’s economy and businesses around the world. Corporations of all sizes, statures and industries have been impacted in one way or another – and numbers from a U.S. Census Bureau survey showed that 51 percent of respondents think it will take over six months to return to some kind of normalcy. While companies navigate COVID-related changes, it’s also important they keep abreast of evolving tax implications to ensure compliance.
In March, millions of people worldwide scrambled to find locations to safely work from as their places of employment shut down. As offices in multiple states remain closed, employers have realized that many of their employees are scattered across the country – which means they now must comply with new legal and tax obligations for multiple states. Withholding for cross-border commuters has become a significant issue. Because of this, employers should consider acting now to evaluate and comply with these state tax requirements. Understanding tax rules and exemptions on a state-by-state basis is critical in 2020 and beyond.
Understand Your State’s Rules
For most, the rules are clear: Generally speaking, state laws require employers to withhold state income tax based on where the employee performs services. The place of residence is a secondary concern. Some states offer reciprocity agreements for staffers who cross a state border to get to work daily, wherein residents of nearby states can work for a business in a different state without incurring the same income tax liabilities as the state they work in.
This is the case for Iowa and Illinois, where Iowa cities like Davenport and Cedar Rapids are commuting options for Illinois residents near the border. Illinois residents working in Iowa are not subject to Iowa income tax laws, nor is the employer required to withhold Iowa income tax for those staffers. The same can be said for Iowa residents working in Illinois, with the intent being a reduction in the number of income tax returns an employee has to file.
COVID-19 has tossed a wrench into the tax schemes for many states that deal with workers who are temporarily in a state. The 42 states that administer an earned income tax generally have well-known thresholds as to how long a nonresident can work in the state before their employer is required to withhold state income taxes, though there may be special dispensation made by those states to ease concerns related to COVID-19. These thresholds are generally expressed in terms of a number of days, an amount earned or a combination of the two. Since March, at least 14 states have issued new guidance on income tax withholding for displaced staffers who are working from out-of-state home offices. Some states, like Alabama and Georgia, are simply choosing not to enforce withholding requirements for those who have been forced to work from home in those states due to COVID-19.
Other states, like Massachusetts and New Jersey, have either reiterated state laws to make it clear that there are no changes in effect or that it would be up to each employer as to how they want to proceed with tax withholdings for staffers. Vermont’s guidance is a bit more forceful, asking employers to “discuss a change to the employee’s withholding state” should they be working from Vermont “for an extended period of time, even if only temporary.”
It’s an important time for companies to evaluate where staffers may be working and adjust accordingly. When employees began to work remotely across state lines, they likely didn’t ask their employers about tax withholding for the different state. It is the employer’s responsibility to know when the relevant tax thresholds apply, and it’s essential to inform staffers of potential changes to withholding, which can affect their net earnings and obligate them to file a state income tax return in multiple states.
Ensuring that a business is registered to pay and report in a state in which employees are now working is also wise. There may be a need to register with a state’s unemployment insurance (UI) division as well, and the rules for when an employer must register for UI purposes are entirely separate. These changes may also affect “nexus” for other tax purposes. The extended presence of an employee in a state where an employer did not previously have a legal presence may obligate them to register with the tax authority, and possibly other state agencies, and to pay and file sales taxes and business income taxes, among other things.
Advice for Employers
The best move employers can make at this time is to evaluate where staffers are working and consult with legal and tax professionals before proceeding down any path. Not only might there be temporary COVID-19 related rules in place with regard to taxes where an employee is working, but states might have issued temporary stays. These amorphous changes may alleviate financial burdens for staffers or businesses but may require extra paperwork.
Watch for federal legislation affecting this issue as well. Longstanding proposals to simplify and standardize the state tax treatment of workers temporarily in a state has been introduced as part of possible federal legislation.
Liaising with staffers as well as tax professionals and lawyers is a wise path forward at this juncture, particularly if those professionals foresee potential issues with taxes and displaced workers. Ohio, for example, enacted COVID-19 relief legislation in March 2020, allowing employees working remotely from any of its municipalities to do so without fear of income tax penalties for employees or businesses.
While states are being reasonable, expect there to be swift changes once it’s generally acceptable for employees to return to their place of work. Similarly, some employees may not want to return to the office, and that may create conflict for businesses who wish to avoid tax or other liabilities. This is just another in the long list of considerations employers and their employees must make.
Pete Isberg is Vice President of Government Relations at Automatic Data Processing, Inc., where he manages legislative and regulatory affairs, covering a wide variety of employment administration and compliance matters and related legislative trends and initiatives. He has over 30 years of experience in working with state legislatures and Congress, as well as the IRS and state tax authorities, state Departments of Labor and Employment Security, child support enforcement and municipal tax agencies concerning employment-related reporting, tax administration, withholding, wage & hour laws and similar issues.
Pete also serves as President of the National Payroll Reporting Consortium, a nonprofit trade association whose member companies provide payroll processing, employment tax filing and related services to more than two million U.S. employers, representing over 36 percent of the private sector workforce.
He is a former member of the IRS Information Reporting Program Advisory Committee (IRPAC) and is recognized by senior U.S. Treasury officials and Congressional tax-writing committees as an authority on payroll and employment tax administration.
He holds an MBA in Finance from California State Polytechnic University. 
