Publish Date

Aug 07, 2020

Whose Convenience Generates State Income Tax Withholding Headaches?

A&M Tax Advisor Weekly

With lock-down orders and social distancing rules in effect, many companies have transitioned their workforce out of the office and into working from home or other remote locations. While initially thought to be a temporary phenomenon, many companies are starting to consider more liberal remote work location policies as workers have proved that a more geographically dispersed workforce is not necessarily the hinderance to business operations that it was once thought to be. As this transition continues, a key question is in which state(s) income taxes should be withheld when employees are now working in different states from that of the office location. This issue is particularly pertinent in the Northeast, where employees often reside in one state and commute to another, but also more broadly as companies relax their mobility policies to allow greater freedom for long-term remote work. As state- and local-level shutdowns ease, employers will need to address when “required” turns into “voluntary” and when “temporary” turns into “permanent”.

Convenience of the Employer Rules

Generally, employers are required to withhold income taxes in the state where the employee performs services; as such, office-based employees are generally subject to tax withholding for the state in which the office is located. However, some states tax wages earned by employees residing in one state, but performing services in another state, and some of those states also impose a withholding obligation on the employer. Therefore, the proper withholding treatment depends on both the resident and working states involved, and therefore must be analyzed based on the particular circumstances involved.

With the transition to working from home and remote work locations, the frequency of these questions have drastically arisen as companies that are struggling with liquidity do not want to be subject to penalties for not appropriately withholding

Unfortunately, there is not a uniform answer to this issue. To add to the complexity, Connecticut, Delaware, Nebraska, New York, New Jersey, and Pennsylvania have a “convenience of the employer rule”: if the employer is requesting that the employee work in a different jurisdiction, then, for state income tax purposes, the employee is subject to withholding based on the location of the second location.

  • Example: X, a Pennsylvania employer, instructs its employees to work from home due to construction to its office for five months. Y, an employee of X, resides in Delaware. Due to the convenience of the employer rule, Y’s wages that are earned for those five months are not subject to Pennsylvania withholding. Rather, Y’s wages are subject to Delaware’s rules.

On the other hand, if an employee chooses to work in another location (e.g., their home) for their own convenience, then the employee’s wages are subject to withholding based on their “assigned” location as opposed to the actual location they worked under the convenience of the employer rule…