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State and local tax implications of remote employees during the COVID-19 pandemic

Jun 19, 2020

In the wake of the IRS extending tax filing and payment due dates under IRS Notice 2020-18, we’ve seen a lot of complexity caused by states’ conformity or non-conformity to those dates. Plus, the abrupt and widespread adoption of telecommuting following COVID-19 has its own state tax implications. Below, we provide a synopsis of potential issues.

Business tax nexus

In general, companies are considered to have nexus in a state for purposes of all taxes imposed by that state (e.g., income, franchise, gross receipts and sales/use) if they have employees working in the state. 

Even though several U.S. Supreme Court cases indicate that the in-state presence of an employee in a state does not give the employer nexus there, unless the employee’s function is substantially related to the employer’s ability to establish and maintain a market in the state, many states do not agree. 

For this reason, prior to the COVID-19 outbreak, many states asserted nexus over employers due to the in-state presence of a single home-office employee.[1] In addition, some states take this position as a matter of state statute.[2]

In the wake of COVID-19, many companies’ employees rapidly shifted from working at an office to working at home. For those employees who lived in one state but worked in another, these employers may find themselves, for the first time, having employees performing significant work in a new state.  Even though states could assert nexus over companies who newly have an in-state physical presence there due to employees working from home, many states have explained that they will not assert nexus over a company solely due to such a connection with the state.


Many states still use a three-factor apportionment method of property, payroll and sales to calculate their business tax apportionment factor. In states where employees are now working from home due to COVID-19, states could assert that the compensation paid to these employees creates a payroll factor numerator there for the employer.

The in-state presence of a home office employee could also affect a company’s sales apportionment factor. For example, some states require revenue from sales other than of tangible personal property to be sourced to the state where the underlying income-producing activity occurs, based upon the related costs of performance. Such states could assert that the compensation paid to employees who are telecommuting from their state require some of the employer’s revenue to be sourced there. 

While few states have explicitly addressed this topic in light of the COVID-19 pandemic, those who have addressed it have concluded that they will not adjust a company’s apportionment percentage solely as a result of the in-state activities of employees temporarily telecommuting from the state as a result of COVID-19.

Individual income tax payment and withholding

For state individual income tax and related payroll withholding purposes, employees’ wages for the performance of personal services are generally sourced to the state where they performed work. 

In the case of telecommuters, this generally means that payroll withholding is due to the state from which they telecommute, regardless of the location of the employer. However, for certain states and cities that have adopted the so-called “Convenience of the Employer” test (Connecticut, Delaware, Nebraska, New York, Pennsylvania and Philadelphia), the wages of remote workers are still sourced to the employer’s location unless the employee can demonstrate that the remote working arrangement was done for the employer’s necessity, not the employee’s convenience.

Even though many employees are now telecommuting due to the COVID-19 pandemic, it seems that such employees would be doing so due to their employer’s requirement, not due to their own convenience. Even though none of the states with a “Convenience of the Employer” test have published guidance regarding this issue in light of COVID-19, the city of Philadelphia has. It concluded that employees of Philadelphia-based employers who are required to work outside the city (such as due to COVID-19) are exempt from the city’s wage tax for days spent fulfilling that work.[3]

Charting state and local taxing authority responses

Wipfli has created a chart to provide a summary of state and local taxing authority guidance regarding this diverse range of topics.

Click here to view the chart.

If you have questions about the application of this chart to your specific situation, please contact a Wipfli professional.

For more COVID-19 resources and assistance, visit our COVID-19 resource center.

Related content:

[1] See, e.g., Appeal of Warwick McKinley, Inc., Cal. State Bd. Equal. No. 489090 (Jan. 11, 2012) (imposing corporate income tax nexus over a Massachusetts corporation due to the in-state presence of one home office employee).

[2] See, e.g., Minn. Stat. § 297A.66 Subd. 1(a)(1) (asserting sales tax nexus over any retailer or marketplace provider who has or maintains within the state, “an office … including the employment of a resident of this state who works from a home office in this state”).

[3] See Wage Tax policy guidance for non-resident employees, City of Philadelphia Department of Revenue (March 26, 2020).


Daniel N. Kidney, CPA, JD
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