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Telework Could Trigger Withholding Changes in Some States

Posted on Apr. 23, 2020

Teleworking in place during the COVID-19 pandemic could trigger new withholding requirements in Maryland and Minnesota.

An April 14 tax alert from the Maryland comptroller's office says employer withholding requirements are "not affected by the current shift from working on the employer's premises to teleworking because taxability is determined by the employee's physical presence."

The guidance addresses questions by the tax community about whether teleworking because of the coronavirus will generate nexus exposure for employers. It explains that Maryland has reciprocity agreements in place with most of the jurisdictions that border it, including Virginia, the District of Columbia, West Virginia, and Pennsylvania. Under the agreements, residents of those jurisdictions who earn wages, salaries, tips, and commission income for services performed in Maryland are exempt from withholding requirements, according to the guidance. 

But Maryland doesn’t have an agreement with Delaware, which means wages paid to employees who live in Delaware and are teleworking in Delaware or Maryland but typically would work from an office in Maryland would be subject to withholding in Maryland, according to the guidance.

The comptroller’s office says it “does not intend to change or alter the facts and circumstances it has consistently used to determine nexus or income sourcing.” However, the office says it “understands that many businesses have been required or otherwise found it necessary during the COVID-19 health emergency to temporarily alter their workplace model and deployment of their employees.”

“Consequently, the office will consider the temporary nature of a business’s interim workplace model and employee deployment in light of the current health emergency in making a nexus determination, whether the business correctly sourced income, and whether the business properly withheld and reported employee state withholding,” the alert says.

Meanwhile, an FAQ posted on the Minnesota Department of Revenue's website explains that teleworking could create new nexus responsibilities for employers.

One of the questions is whether the state will impose added individual income tax or payroll withholding tax requirements for employees who usually work outside the state but are temporarily telecommuting from Minnesota. The response is, “No. For Minnesota residents, there are no additional payment or withholding requirements. They are already taxed on income earned inside and outside the state.”

However, for nonresidents “the apportionment of their income may change based on the number of days they physically work in Minnesota,” according to the FAQ.

In an April 20 alert, advisers at Eversheds Sutherland (US) LLP said businesses in Maryland and Minnesota “may need to change their withholding to reflect employees’ states of residence as their place of work.”

However, the advisers said Maryland’s reciprocity agreements with most surrounding states “could mean few changes for Maryland employers."

Patrick Reynolds, senior tax counsel of the Council On State Taxation, told Tax Notes April 22 that COST thinks states should allow employers to have the option to continue to treat employees as working at their regular work location for payroll tax purposes.

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