As the business world slowly, or in some cases swiftly, emerges from the stupor of the past year, most of us are going to start encountering changes, both positive and negative, from the ways that we used to do our jobs. Whether working from home, back in the office in a hybrid fashion or fully returned, some things will change and some will not. One thing that will likely increase will be the issuance of audit notices, assessments, etc. that will be received from the state and local taxing authorities, and the scrutiny many employers will experience depending upon their historical and prospective employment footprint. As employers struggle to find some normalcy in how and where people worked, the various tax agencies will have to contend with the employment tax fallout and address the impact of employees working from anywhere, and auditing accordingly, now and in the future.
Most employers implemented temporary work from home/work from anywhere policies for their employees, and many states similarly developed relief provisions with respect to income tax withholding and state unemployment to help individuals and employers avoid double taxation. However, while the states are winding down, or eliminating, this temporary relief, many employers are struggling with how to adapt to a workforce that has been working remotely for the last year plus…and likes it! As you move forward, keep a few things in mind when considering employment taxes:
It is your responsibility as an employer to know where your employees are working and to withhold, remit and report state/local income taxes accordingly. If your organization has decided to adopt go-forward policies allowing for remote work to some extent, or completely, your employment tax position should reflect those changes and your payroll tax and HRIS systems should be in alignment.
State income tax reporting and state unemployment insurance liability do not necessarily align with each other. While SIT is generally required in the jurisdiction where services are performed (with a few notable exceptions) SUI taxation may be defined differently through a series of “locality” tests. Work with your tax adviser to determine where those differences might be and how to be compliant on both fronts.
Don’t forget about liability related to your local payroll-based taxes. Many jurisdictions, especially those in states like Ohio and Pennsylvania, have complex local tax requirements on top of their SIT system. During the past year, many folks have relocated…to warmer climates, parent’s houses, in with significant others, etc., and with those relocations come new local tax responsibilities put on both the employer and the employee. Localities can often be more aggressive than states in addressing their tax base, and they often take non-reporting very seriously and personally, so take a hard look at new resident addresses and adjust where necessary.
A few states have formal regulations related to individuals who are (or were) assigned to primary work locations in their jurisdiction but have chosen or even been required to work from another state. This “Convenience of the Employer” position is being tested in many ways now, particularly where the question of exactly whose convenience is in question has become more convoluted. While I could write a multi-page article on this topic alone, consider cases where employees were originally assigned to primary work locations in Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York and Pennsylvania but may be working elsewhere now, and how your organization may need to adapt.
Quick Takes
A few employment tax/payroll considerations to keep front-of-mind:
Your employees may soon come back to you with employment tax issues for 2020 as the states receive their personal income tax returns. In cases where employees left a state to work elsewhere, but still had withholdings in their original work state, they may have requested refunds that are being scrutinized or denied because of a mismatch with their Form W-2 reporting. Consider how to handle these requests most efficiently and accurately for all involved.
If your organization experienced closures or significant declines in gross receipts in 2020 and into 2021 and you have not taken advantage of the Employee Retention Credits available as part of the CARES Act and subsequent legislation…what are you waiting for? Refunds/credits available are now a maximum of $33,000/eligible employee, well worth exploring for almost all employers, but especially for small and mid-size organizations hit hard in 2020 and early 2021.
Although not usually a large financial consideration for most employers, often just seen as a cost-of-doing-business, state unemployment taxes will become more significant as states begin to face the impact of the past year. While some unemployment benefits were federally funded and/or not directly charged to employers, the impact will be felt for years to come due to state reserve deficits. Remember to analyze your 2021 tax rate assignment and consider the 2022 impact when budgeting for your next fiscal year, especially in your significant states of employment. States such as Connecticut, Kentucky, Massachusetts, and North Carolina have already enacted new legislation with both employer positive and negative ramifications, as they begin to address the COVID unemployment insurance fallout in their states.
All in all, a clearer path to payroll and employment taxation lies just ahead, but there are always twists and turns along that road. The past year has certainly seen a series of those twists, but with proper planning and a strong foundation, your organization should be able to move forward and adapt to the changing tides.
More to come…
Scott Schapiro is the President and founder of EX4 Payroll Tax Consultants, LLC. Scott has 36 years of payroll tax experience, the last 25 spent at KPMG LLP, with the past 12 years as the National Partner in Charge of KPMG's U.S. Employment Tax practice, before retiring to open his own firm. He can be reached at scottschapiro@ex4payrolltax.com or 301.938.1122.
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