Working from Home: State Income Tax Withholding Requirements
With most of the nation confronting mandatory stay-at-home orders the past few months, many employers have allowed employees to work from home. As a result, the states are beginning to issue guidance on the impact this will have on withholding obligations for multistate employers. This guidance comes in a variety of ways:
- Maintain “status quo” (disregard work-from-home location) – certain states will continue to source wages as determined in accordance with the employer’s jurisdiction, regardless of the employee’s work-from-home location and forgo imposing new withholding obligations on out-of-state employers.
- Established rules apply – some will follow the existing rules and source wage income to the employee’s current work location, potentially triggering new registrations and withholding requirements for out-of-state employers.
- Other – several jurisdictions have not yet issued explicit employer withholding guidance.
Missouri and Illinois: Established rules apply
According to guidance from the Missouri General Counsel’s Office, Missouri withholding should be based on an employee’s physical work location. This has not changed as a result of the pandemic.
Similarly, Illinois withholding is based on the employee’s work location. However, Illinois does allow for a 30-day safe harbor. If an employee has performed work for more than 30 working days in Illinois, the employer may be required to register and withhold Illinois income tax from the employee.
Illinois and Missouri employers with nonresident employees working from home should assess their current withholding practices and consider the potential risks of non-compliance.
City of St. Louis: Maintain “status quo”
Currently, non-city residents working away from their employer’s St. Louis City office because of the coronavirus outbreak must continue to pay the city’s earnings tax, according to city officials. In years past, workers could fill out an E-1R earnings tax refund form for days worked outside of the City. However, the City has indicated that such refunds will be denied for remote work-from-home workers, a move that could bring legal challenges. Of course, any potential court challenge will have to wait for the City to deny a refund next tax season and a taxpayer to challenge it.
In addition to withholding issues, having employees working remotely can potentially impact an employer’s business taxes (e.g., income, franchise, gross receipt, etc.), sales/use tax collection, and even general business policies.
Employers should know where their employees are working from and monitor their time in that location. Additionally, employers should continue to monitor the guidance issued by the states and understand the impact on their business. To further discuss or for other state and local tax questions, please contact Pam Huelsman, Principal, Tax Services, at firstname.lastname@example.org.