The South Carolina Department of Revenue has issued a draft rule announcing the end of nexus and income withholding relief for employers with employees working remotely because of the COVID-19 pandemic.
The draft revenue ruling, proposed March 29, announces the expiration of a May 2020 information letter (Information Letter 20-11), which said the DOR wouldn’t use temporary changes in an employee’s work location during the pandemic to impose an income tax withholding requirement. The expiration would be effective June 30; public comments on the ruling are due by April 19.
Information Letter 20-11 was extended five times, with the most recent extension ending March 31. In addition to limiting the withholding obligation of employers with remote workers, the guidance served as “temporary relief regarding a business’s establishment of nexus solely because an employee is temporarily working in a different work location due to COVID-19,” the DOR said.
The department cited the relaxation of COVID-19 restrictions as a reason to end the relief, but it conceded that some of the changes to the work environment brought by the pandemic are here to stay, including remote work.
The ruling summarizes the state’s withholding requirements under current law and explains that the wages of a South Carolina resident earned in another state aren’t subject to South Carolina withholding requirements if the wages are subject to withholding in the other state, and if the employer is withholding income taxes on behalf of the other state.
The ruling also notes that wages of nonresidents who work partially in the state and partially outside it are subject to South Carolina withholding "only to the extent the wages are for services rendered" in the state.
Further, the draft describes the conditions under which some remuneration would be excluded from the definition of wages for withholding purposes, and how to determine withholding in a case in which an employee is earning both taxable wages and exempt remuneration.
The draft provides various examples to describe how the withholding requirements could be applied in specific scenarios.
Charlie Kearns, partner at Eversheds Sutherland (US) LLP, told Tax Notes in a March 30 email that "the substance and timing of the department’s withholding guidance has been helpful over the pandemic period. The nexus hold harmless and the ability to maintain the status quo for withholding was beneficial to South Carolina employers, who also appreciate the heads-up for transitioning back to the 'normal' rules."
Kearns added that employers will need to review the rules soon to prepare for the June 30 end date of the pandemic rules. "If an employer adopted or plans to adopt a full-time or hybrid remote work policy, then South Carolina withholding obligations could change once the temporary guidance expires," he said.
Kearns also noted that "a change in South Carolina tax withheld could impact withholding obligations in other states, like North Carolina — and vice versa — where an employee may work remotely for at least part of a pay period at their out-of-state residence."