The COVID-19 pandemic has caused turmoil throughout the economy as states have issued state-at-home, shelter-in-place, and other orders closing offices and forcing employees who traditionally go to work each morning to work from their dining room tables or spare bedrooms of their own homes or from alternative locations such as rentals away from COVID-19 hotspots or the homes of relatives. Among those employees include employees in the human resources, payroll, and tax departments of employers. Similarly, employees of payroll processors—both large and small—may be working remotely and processing payroll using new processes and systems. Throw in a series of new federal payroll tax credits, the deferred deposit of employer social security taxes, new section 139 plans, and millions of furloughed and laid off employees, and the stage is set for a host of unintentional payroll processing errors that may subject employers to tax penalties. While the IRS is hard-at-work on a new Form 941 to reflect the changes adopted as part of the Families First Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) some states have taken steps to address some of the payroll difficulties caused by the COVID-19 pandemic.
A review of state tax relief for teleworking employees and their employers reveals that the states have taken varied approaches. A number of states have provided no relief at all, providing either no explicit guidance on withholding taxes or the sourcing of income for teleworkers. While most states have extended the deadline for filing income tax returns, some states have applied such relief to payroll tax returns and the deposit of state taxes withheld from employees or paid by employees on compensation. A limited number of states have provided guidance on how employers should adjust—or not adjust—their approach to withholding on employees who traditionally worked in one state but now find themselves working from home in another. This post provides a non-comprehensive overview of guidance from a number of states as of May 5, 2020. Readers should verify the guidance provided by specific states regarding tax relief related to COVID-19.
Withholding Tax Return and Tax Deposit Relief Guidance
Of the states surveyed, the majority offered no relief with respect to withholding tax returns. In other words, the returns and tax deposits are expected on the original due dates. Several states specifically indicated that withholding taxes are trust fund taxes (i.e., taxes held in trust for the state) and, therefore, were not subject to COVID-19 relief.
However, some states have provided for limited relief for withholding tax returns and related deposits. In particular, some states allowed for delayed returns and taxes for the first calendar quarter of 2020 until later in the second quarter or even July. Some states, including North Carolina, have allowed specifically for the late filing of returns and the payment of tax without penalty, but cautioned that interest would apply with respect to the late payment of tax due to the lack of statutory authority to defer interest. After initially making an announcement similar to North Carolina’s regarding the non-assertion of penalties for late filed returns but signaling the obligation to assess late payment interest by statute, New Mexico subsequently announced that interest would not be assessed. California announced that employers may request an extension of up to 60 days from the EDD to file state payroll reports and/or deposit state payroll taxes without interest. As with all things related to California tax compliance, employers should carefully review California’s criteria for relief and exercise caution when seeking relief.
Pennsylvania issued a vague statement regarding the availability of penalty relief for the late payment of trust fund taxes after it stated that such taxes must be remitted in full in accordance with the employer’s filing frequency. Based on its discussion, it is unclear how the Pennsylvania Department of Revenue will treat abatement requests in this context.
Teleworking Guidance Regarding Compensation Due to COVID-19
A few states have provided guidance on the application of their source rules to employee situations arising due to COVID-19, including Massachusetts and Pennsylvania. In its guidance, the Massachusetts Department of Revenue explains that if a nonresident of Massachusetts performs services in Massachusetts immediately prior to the Massachusetts COVID-19 state of emergency, and then during the state of emergency continues performing services from a location outside of Massachusetts due solely to the COVID-19 state of emergency, the wages will continue to be treated as Massachusetts source income subject to Massachusetts personal income tax and subject to Massachusetts personal income tax withholding.
Similarly, a Massachusetts resident employee working in Massachusetts due to the COVID-19 pandemic who continues to incur income tax liability in another state due to the state’s source rule will be eligible for a credit for taxes paid to the other state. Further, the employer of such an employee is not obligated to withhold Massachusetts income tax to the extent the employer must withhold income tax with respect to the employee for the state in which the employee performed the services. The analysis by Massachusetts in this example resembles the convenience of the employer standard generally applied by New York.
In informal guidance published in April, Pennsylvania took a similar position. In the example, Pennsylvania assumed that an employee who normally works in Pennsylvania and earns Pennsylvania source income works from home temporarily in another state due to the COVID-19 pandemic. The guidance concludes that the department would not consider working from home in another state as a change to the sourcing of the employee’s compensation for purposes of wage reporting, employer withholding, and for state apportionment purposes. Thus, the compensation would be treated as Pennsylvania source income even though the services were performed at an out-of-state location.
New Jersey has issued similar guidance. Specifically, during the temporary period of the COVID-19 pandemic, New Jersey will continue to source wage income as determined by the employer in accordance with the employer’s jurisdiction. In addition, New Jersey indicated that it would not require employers to change the work state set-up for employees in their payroll system due to temporary telecommuting or relocation but cautioned that employers must consider their “unique circumstances and make that decision.”
Guidance Regarding Nexus Issues Prompted by COVID-19
Although most states do not appear to have addressed nexus issues as it relates to changes for employees brought about by COVID-19, several states have specifically advised that they would not use the temporary relocation of employees or alternative working arrangements for employees caused by COVID-19 as a basis for establishing nexus for certain taxes or as a means of challenging the protections under P.L. 86-272 (codified as 15 U.S.C. § 381). Among these states are Indiana, Massachusetts, Mississippi, and North Dakota. Although this guidance has focused on income tax nexus and income tax apportionment, similar nexus issues exist with regard to employees who are temporarily teleworking from states in which the employer does not otherwise have a presence.
Delays for Income Tax Returns and Estimated Income Tax Payments
The most common relief provided by the states relates to the filing of 2019 income tax returns and making estimated income tax payments for 2020. Where relief has been provided, a number of states have followed the approach of the IRS and extended deadlines for filing 2019 income tax returns and making 2020 estimated tax payments until July 2020. A non-exhaustive list of states that have extended the filing date for 2019 income tax returns include Colorado, Connecticut, Hawaii, Illinois, and New York. A non-exhaustive list of states that have allowed for delays in making 2020 estimated income tax payments include California, Georgia, Maryland, South Carolina, and West Virginia.