This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction. When the COVID-19 pandemic hit and many employees were told to work from home, some of them decided that could mean working from their parents' home on the Florida coast or an Airbnb in the Colorado mountains. In 2004, the United States Supreme Court had a chance to weigh in on New Yorks convenience rule but declined to do so. Similarly, New Jersey revised its administrative guidance4 setting Oct. 1, 2021, as the expiration date of its temporary nexus and withholding guidance. New York provides an exception from the convenience of the employer rule in limited circumstances. As such, it is imperative to accurately reflect changes in the calculation of apportionment during the tax year, as well as part of the tax compliance process. This includes historical taxes imposed on passthrough entities and the more recent elective passthrough entity taxes designed to work around the federal $10,000 state and local tax deduction limitation included in the law known as the Tax Cuts and Jobs Act.20. Code. Now, the physical location of businesses has less relevance. In addition to cookies that are strictly necessary to operate this website, we use the following types of cookies to improve your experience and our services: Functional cookies to enhance your experience (e.g. During 2003, Zelinsky brought a similar suit in the New York courts, which he ultimately lost. South Dakota v. Wayfair, 138 S. Ct. 2080 (2018). Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. New York, which has a significant influence on nonresident taxation, considers days telecommuted to be days worked in New York unless the employer has a bona fide location set up in the remote workers locality. If you would like more information regarding the exception to the New York convenience of the employer rule, or if you have received a desk audit notice or questionnaire from the Department regarding your allocation of income to New York and you need guidance, pleasecontact us. Field Audit Guidelines. May 07, 2021 01:30 PM. A tax nexus is a states determination that an organization has a presence in the jurisdiction. A Connecticut resident assigned to work in New York but working from home in Connecticut also should be able to claim a credit on taxes paid to New York. Absent any special waiver, a remote employee can create nexus for various taxes, including income taxes, gross receipts taxes, sales taxes, and local business taxes. References Jurisdictions are shifting from temporary relief and guidance, driven by the pandemic, to enacting new legislative, regulatory, and administrative guidance to adapt to the expansion of more permanent remote-work arrangements.21 Tax professionals will find opportunities to be both proactive and reactive in addressing these evolving state and local tax issues. 4See N.J. Div. The employer must withhold from the employee's wages in compliance with the remote state's rules. Specifically, the New Jersey Division of Taxation (New Jersey Division) website states that, while New Jerseys "sourcing rules dictate that income is sourced based on where the services or employment is performed based on a days method of allocation," during the COVID-19 pandemic, "wage income will continue to be sourced as determined by the employer in accordance with the employers jurisdiction.". These new circumstances have raised unique issues regarding wage income sourcing, state payroll tax withholding, and income taxability for both employers and employees. The second is statutory residency, which considers an individual to be a statutory resident if they spend more than 183 days in that states jurisdiction. Care needs to be taken in understanding how the credit may work especially if you are a statutory resident in one state, a permanent resident in another state and potentially have nonresident source income from a third state. In Huckaby v. New York State Division of Tax Appeals (04-1734), a New York state court found Thomas L. Huckaby liable for taxes on . The property factor looks to the value of a company's real and tangible personal property owned or rented and used within a state. . New York City follows NY State guidance. Passionate about tax transformation and innovation within the industry. 86-272 (the Interstate Income Act of 1959) should pay particular attention to their remote workforce. Where remote work exposes the company to liability, such companies may need to consider creating "blacklist states" states where employees are prohibited from working remotely. 2d 619 (2004) (denying certiorari requested by a taxpayer challenging New Yorks convenience rule). Connecticut recently introduced a limited convenience rule, beginning in tax year 2019. EY is a global leader in assurance, consulting, strategy and transactions, and tax services. Zelinsky is claiming a refund attributable to the percentage of time spent working from home in Connecticut. Secondary factors are the following: (1) the home office is a condition of employment, (2) the employer has a bona fide purpose for the home office location, (3) the employee performs core duties from the home office, (4) the employee meets or deals with clients regularly at the home office, (5) the employer does not provide the employee with a designated office space at its regular places of business and (6) the employer provides reimbursement of substantially all expenses for the home office. sourcing of New Jersey residents who telecommute. State Income Tax. In either case, it is imperative to have a clear picture of the issues of importance to each organization and obtain reliable data on the remote-work arrangements, including documentation of employer policies, plans for future modifications, and detailed information on where employees are working and what job functions they are performing. They are responsible for withholding state income tax and will be familiar with your situation. The evolution and expansion of remote working provides tax professionals with an opportunity to put these skills to work and drive value for their businesses and clients. Before remote work became the new normal, it was easy for employers to comply. However, as Zelinsky points out in his renewed petition, times have changed and they have changed drastically since 2003 due to advances in technology, coupled with the need to quickly pivot to remote work on a large scale because of COVID-19. 21See also Yesnowitz, Sherr, Bell-Jacobs, "AICPA Focuses Advocacy Efforts on Mobile Workforce Legislation,"52The Tax Adviser50 (January 2021). Remote Workers May Owe New York Income Tax, Even If They Haven't Set Foot In The State. 8. Last year, Ariele Doolittle, a tax lawyer, got a call from a client who lived and worked in New York but was considering working remotely from California temporarily . By nature and experience, state and local tax professionals are already very adept at addressing the complexity that comes with juggling multiple jurisdictions and tax types, constant changes and developments, and the uncertainty that comes from a lack of authoritative guidance. CFOs can look to tax functions to help navigate economic uncertainty, Select your location Close country language switcher, Managing Director, Indirect Tax, State and Local Tax, Ernst & Young LLP. Generally speaking, a remote employee will create nexus for the employer for tax purposes and as Telebright illustrates such connection will likely withstand constitutional scrutiny. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. . For example, some states treat telecommuters as creating a tax nexus, while others have issued guidance stating that a nexus cannot be established solely by employees telecommuting from within the state due to COVID-19. 2023 Experian Information Solutions, Inc. All rights reserved. State & Local Tax Considerations for Remote Employees During the COVID-19 Pandemic, Setting Up Your Box Account & Accessing Your Files, City of Philadelphia Department of Revenue, State Guidance Related to COVID-19- Telecommuting Issues. Notably, this is not the first time the professor has brought this case. As of 2022, 16 statesArizona, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsinand the District of Columbia have reciprocal tax agreements in place. In Telebright, the court analogized the employee's software writing to that of a manufacturing employee who fabricated parts in New Jersey for a product that was then assembled out of state.The court reasoned that the statute should be construed broadly and, without difficulty, concluded that TeleBright was "doing business" in the state by virtue of the telecommuting employee. But both of those taxpayers brought . Code tit. Under the convenience rule, taxes related to work-from-home days for non-resident employees assigned to work in New York are generally allocated to New York, regardless of where the employee lives. Based on guidance on its website, the New York Department of Taxation and Finance (Department) recently reiterated that it will enforce the New York convenience of the employer rule even during portions of the pandemic when employees were legally prohibited from traveling to New York. Telecommuters Assigned to the NY Location of Their Employer but Working Outside NY Due to the Pandemic May Be Taxed Twice. Why? The New York Department of Taxation and Finance has finally provided guidance regarding telecommuting tax liability for nonresident employees working outside of New York because of the COVID-19 pandemic. Enjoy spending time with my family, reading and traveling. As businesses enter the clichd "new normal," it may appear everything has changed. 2068, 158 L.ED. In addition, Connecticut currently permits non-residents to work up to 15 days per year in the state before becoming subject to the state's income tax. One of the most sweeping economic changes arising as a result of the pandemic is the shift from in-person to remote working. Visit www.tax.nys.gov (search: IT-2104-I) or scan the QR code below. To meet social distancing guidelines and protect their employees while also keeping business rolling, most companies have asked employees to work remotely from their own houses or locations convenient to their employees. Experian Employer Services Tax Withholding Services can assist companies in determining the proper state tax withholding for remote and on-site employees. Given the prolonged length of the pandemic and the adjustment to remote work for both employers and employees, remote work may very well . Generally, N.J.S.A. As of February 2022, 39% of remote-capable employees were fully remote, 42% were hybrid and only 19% were fully on-site, according to Gallup. The COVID-19 pandemic radically transformed the workplace and likely for good. This informational form gives you all the details you need to complete a 1099 and also lets you know if your contractor is exempt from receiving a 1099. 1504 (Del. In California, a permanent resident will be subject to the states income tax. Loves intellectual debates on various topics. See Ark. Conn. Gen. Stat 12-704(a) (similar to New Jersey, the credit is limited to the amount the proportion of the Connecticut residents non-Connecticut-sourced income "bears to such taxpayers Connecticut adjusted gross income." The main principle is that workers pay taxes in the state where they live and work. It should also review state and local tax laws as they apply. All of these apportionment changes can first be expected to affect quarterly financial statement reporting and estimated payments, then ultimately the preparation and filing of state and local income and franchise tax returns. However, due to the New York convenience of the employer rule, unless it can be shown that John must work from home out of necessity, every day spent working from his home in New Jersey will be counted as New York working days, and John will be taxed by New York on all his wage income. New York follows the convenience of the employer rule, in which the employer must withhold NY's state income tax from all wages of the employee If the employee spends at least one day in NY, AND they are working from home outside of the state for the employee's convenience. Thus, employers who decide not to withhold on the full amount of an employee's salary should have well-crafted policies that explicitly lay out the terms of the employer's requirement that the employee work from home permanently or for a set amount of time to ensure that on audit the policy and position will withstand scrutiny. On May 4, 2020, the Office of the Comptroller of Maryland issued updated guidance to address withholding questions it received concerning temporary telework within the state due to COVID-19. The number of hybrid and remote employees has greatly increased since the onset of the pandemic. By way of . So, if your company is based in Michigan, but you're employing a full-time remote employee who lives in New York, you (as the employer) need to register with the relevant tax authorities and deposit taxes in New York. Determine state-specific guidance regarding COVID-19 and the time frame of any relief granted. The Senate's Remote and Mobile Worker Relief Act of 2021 would stop states from withholding taxes for nonresident employees who are only in the state for 30 days or less. Resources. By contrast, New Jersey appears to provide relief for taxpayers who are residents of New Jersey and working from home while assigned to work in New York. Wilmington Earned Income Tax Regs. 86-272 protection. Many assumed that these employees worked remotely out of necessity . Employers face the challenge of determining where a tax nexus exists and what emergency-related exemptions and reciprocity agreements apply. Planning should be done proactively for unforeseen future tax consequences. These types of considerations should be incorporated into the overall analysis of apportionment factors and effective tax rates. (For the previous guidance, see EY Tax Alert 2020-1067. Most of these notices were issued in the form of a desk audit, which is automatically generated when the Departments system notes a discrepancy in a tax return from a prior year filing. Here's Big Rule #1: Any state that can claim you as a resident gets to tax your income. Tax Section membership will help you stay up to date and make your practice more efficient. By Ann Carrns. By: Impacted New Jersey and Connecticut residents are currently eligible to claim a credit for taxes paid to New York State. The FAQ confirmed that if a nonresident employee whose primary office is in New York State is telecommuting from outside the state due to the . Code tit. , 801 N.E.2d 840 (N.Y. 2003), 541 U.S. 1009 (2004) (, P.L. Tax App. TSB-M-06(5)I (May 15, 2006). 484), Laws 2021). The COVID-19 pandemic has forced many businesses to close physical offices and transition their workforce to a remote work format. Generally, your income tax is based on where you're physically located when earning the income. Therefore, the shifting of employee work locations, whether on a permanent or hybrid basis, has the potential to affect the payroll factor. Zelinsky v. Tax Appeals Trib., 541 U.S. 1009, 124 S.Ct. The only way to ensure that employees comply with state- or country-specific tax and immigration requirements is to implement a fully integrated solution into the travel booking workflow. ACA reporting compliance is important for employer tax filing. Under the New York convenience of the employer rule, the wages of an individual who is a resident of a state other than New York but who works for a New York-based employer, are considered to constitute New York source income unless, out of necessity, the employee is obligated to work outside of the state. New York also has a convenience rule, under which New York state tax withholding for remote employees must be withheld if an employee works outside New York for their convenience rather than due to employer necessity. 86-272 protection if the employee does anything more than solicitation within a particular jurisdiction. Other states have an income threshold, or a combination of time and income. See also Bell-Jacobs, McCann, Wlodychak, "Where Individual, Corporate, and Passthrough Entity Taxation Meet," 52The Tax Adviser392 (June 2021). Income tax withholding when the employee is living & working from home in a state different than their normal base of operations. & Fin., Technical Memorandum No. This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19. Remote employees are employees who work outside of the office setting and are on a companys payroll, while independent contractors are self-employed and responsible for managing their own taxes. . If you transferred from another state agency, your withholding elections will transfer with you. In its frequently asked questions concerning filing requirements, residency and telecommuting for New York state personal income tax, the New York Department of Taxation and Finance (the "Department") states that the rules set forth in its 2006 guidance on telework (Technical Services Division Memorandum TSB-M-06(5)I) continues to apply when employees are working remotely from outside the . COVID-19. EY | Assurance | Consulting | Strategy and Transactions | Tax. Believes in driving change by thinking taxes. Devoted husband, father of four. An individual with net-earnings from self-employment must file a reconciliation return, Form MTA-6, Metropolitan Commuter Transportation Mobility Return, to reconcile his or her MCTMT . Naturally, your home state (also known as your domicile) is a given. New York Department of Labor officials explained their views on cross-border work arrangements, noting that all New York laws apply immediately if employees work remotely in the state. No. remember settings), Performance cookies to measure the website's performance and improve your experience, Marketing/Targeting cookies which are set by third parties with whom we execute marketing campaigns and allow us to provide you with content relevant to you. Recognizes the debate is lost when the name-calling starts. Additionally, employers that did not previously maintain a remote workforce and for whom it was generally unnecessary to track employee work locations may find unique hurdles for compliance. Moreover, TeleBright was already withholding and paying New Jersey state income tax on the employee's salary thus, the additional effort of calculating and paying the CBT should not constitute an undue burden. Cost-of-performance sourcing is likely to reflect a more significant impact related to remote working. Employers may be required to report taxable employee benefits, such as bonuses and stipends, for remote workers and withhold income taxes for the respective states.