Q: I run a small consulting firm. During the pandemic, many of our employees have relocated outside of Massachusetts. Sometimes to a parent’s home or sometimes to a vacation home. What is our responsibility as an employer, from a payroll perspective? Do we have to chase them down for a new state tax form in their new state? Do we have to register in that state now? What if they are there on just a temporary basis?
A: We are seeing similar patterns within our client base. An employee no longer wants to pay to live in Beacon Hill to walk downtown. Instead, they are sometimes retreating to a second home or returning to their home state. Prior to this pandemic, most of us lived in one state and worked in that same state. It was a simple and easy in most cases. However, in New England, we had some experience with employees “crossing the border” to work in another state. There were “reciprocal agreements” between states, which solved the challenge of one state having no income tax. Usually this meant that income tax was due to the state where the work was performed. In some cases, an employee was still required to pay taxes in an employee’s home state, even if the work was not performed there. This is called a “nexus” and is probably best explained by the CPAs.
During this pandemic, employers should be aware of the need to register and pay income taxes in the new home state of their employee. If an employee had been living in Beacon Hill, but returned home to live with their parents in Virginia, the employer must now register in Virginia. Where is the work performed? That is often the key question.
I consulted Jeff Plakans, Founder and President of Commonwealth Payroll & HR, to ask him more specifically about the movement of employees during this pandemic. Plakans referenced the recent tousle between Massachusetts and New Hampshire, where Massachusetts is trying to ensure employees formerly commuting to Massachusetts from New Hampshire, continued to pay Massachusetts income tax even after they had returned home to New Hampshire to work remotely.
Plakans also shared a directive dated 2/12/21 from the Massachusetts Department of Revenue (DOR), to assist in the preparation of employee individual income tax returns for 2020. According to Plakans, the DOR refers to two groups of employees:
- Non-residents who worked in Massachusetts prior to the Covid-19 State of Emergency, but began working remotely outside the state after, (non-resident telecommuting employees); and
- Residents who worked in another state prior to the Covid-19 State of Emergency but began working remotely from a Massachusetts work location (resident telecommuting employees).
Plakans explains, “The directive indicates that both types of employees in both cases need to recognize their wages as Massachusetts wages, even from work performed remotely from Massachusetts or for a Massachusetts company as before regardless of their actual work location. Now that the virus spread seems to be subsiding, our newly won freedom is causing tax problems for employers who have decided that a looser policy on remote work, where they are required to follow and pay attention to the actual work location of their employees, in many cases register with work locations in those new states, and navigate the myriad of reciprocal agreements at play as their employees roam.”
What is challenging is that states vary in how they work with Massachusetts. Plakans encourages that an employer confers with an accountant or payroll provider, as Michigan may be different than California. It is also important that employees keep their employer updated with respect to their work location(s).
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