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Working From Home: Understanding State Income Tax Withholding Requirements

Small Business Monthly
07.01.2020

In the July 2020 issue of the Small Business Monthly “Financial Fitness” column, Pam Huelsman, Principal and State and Local Tax Practice Leader, discusses state income tax withholding requirements in light of the many organizations with employees working from home during the COVID-19 pandemic.

As a result of the COVID-19 pandemic, many employers currently have (or have had) employees working from home to maximize safety. States are beginning to issue guidance on how this decision will affect withholding obligations for multi-state employers. Thus far, such guidance has taken three forms:

  • Maintain “status quo” (disregard work-from-home location) – No new withholding obligations required. Employees’ work locations are disregarded, and wages will be sourced in accordance with the employer’s jurisdiction.
  • Established rules apply – Some states will continue to follow existing rules and source wage income to the employee’s current work location. This approach could affect an out-of-state employer’s withholding requirements and registrations.
  • Other – Several jurisdictions have yet to issue explicit withholding guidance for employers.

Missouri and Illinois will follow existing rules and will base withholding on an employee’s physical work location. However, Illinois does allow for a 30-day safe harbor, which means that employers with employees who have worked more than 30 business days may be required to register and withhold Illinois income tax from those employees. Missouri and Illinois employers with nonresident employees working remotely should assess current withholding practices and consider the potential risks of non-compliance.

The City of St. Louis will maintain “status quo.” If a City non-resident is working away from his or her employer’s St. Louis City office because of COVID-19, that non-resident will remain subject to the City’s earnings tax. The City has indicated that earnings tax-refund claims filed by such remote workers will be denied, a move that could bring legal challenges next tax season.

In addition to withholding issues, employees who are working remotely can impact an employer’s business taxes, sales/use taxes and general business policies.

For more information on state income tax withholding requirements, please contact Pam Huelsman at phuelsman@bswllc.com or 314.983.1392.

Team

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