practical solutions to tax issues facing employers with

Practical Solutions to Tax Issues Facing

Employers With Increased Telecommuting

December 8, 2020

Presenters

2

Moderator:

Matt HunsakerLeader of the State

and Local Tax Team

BakerHostetler

Panelist:

Ted BernertPartner

BakerHostetler

Panelist:

Dave EbersoleAssociate

BakerHostetler

Panelist:

Mike Semes

Of Counsel

BakerHostetler

Panelist:Liz Bucko

Senior Director

Compliance Products

UKG

Disclaimer

These materials have been prepared by Baker & Hostetler LLP for

informational purposes only and are not legal advice. The

information is not intended to create, receipt of it does not

constitute, a lawyer-client relationship. Readers should not act

upon this information without seeking professional counsel. You

should consult a lawyer for individual advice regarding your own

situation.

3

Overview of Today’s Discussion

• Background

• Know your tax environment

• Consider the impact of changing the place of withholding on the employer’s business taxes

• Revise or adopt policies– Where employees may work or are

required to work

• Keep and maintain records– Where employees perform work

• Summarizing business solutions

4

Withholding for Work-At-Home Employees

• Increased levels of working from home are creating challenges for employers.

• Issue has two aspects:

– During the current pandemic; and

– Longer term

• Some states and cities have provided safe harbors during the pandemic for employers to continue existing withholding practices.

• This has prevented a major disruption of withholding procedures for employers - but issues remain.

5

Hypothetical Case

6

Employee

Residence

Pre-COVID

Office

Employer Employee

New JerseyPhiladelphia May continue to withhold Wage Tax File for refund of Wage Tax in 2021

Pennsylvania Withhold NJ tax* Pay NJ tax

Delaware

Philadelphia May continue to withhold Wage Tax File for refund of Wage Tax in 2021

Pennsylvania Withhold PA tax** Credit on DE return? Refund of PA tax

withheld?

* Because of PA/NJ Reciprocity Agreement.

** Is PA’s guidance correct?

Employer

(Philadelphia, PA

Office

Employee

(NJ

resident)

Employee

(DE

resident)

• New Jersey and Delaware residents regularly worked at employer’s office location in Philadelphia

• Because of COVID, their employer requires them to WFH.

• Results can vary . . . even within a state!

Know Your Tax Environment

• Reciprocity agreements

• Convenience of the employer rule

• Special rules during the pandemic

• Possible legislation

7

Reciprocity Agreements

• Reciprocity agreements among states may relieve employers from obligation to withhold income tax.

– Provided employee certifies nonresident status via required forms.

• Example: Ohio has reciprocal withholding agreements with surrounding states Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia.

– Ohio employers not required to withhold for a Pennsylvania resident working in Ohio (if nonresident certification provided).

• Review whether business locations are in states that have reciprocity agreements.

8

Reciprocity Agreements

9

State Reciprocity Agreements with:

Arizona CA, IN, OR, VA

Arkansas Texarkana, TX, residents working in Texarkana, AR (only).

District of Columbia MD, VA

Illinois IA, KY, MI, WI

Indiana KY, MI, OH, PA, WI

Iowa IL

Kentucky IL, IN, MI, OH, VA, WV, WI

Maryland PA, VA, District of Columbia, WV

Michigan IL, IN, KY, MN, OH, WI

Minnesota MI, ND

Montana ND

New Jersey PA

North Dakota MT

Ohio IN, KY, MI, PA, WV

Pennsylvania IN, MD, NJ, OH, VA, WV

Virginia KY, MD, PA, District of Columbia, WV

West Virginia KY, MD, OH, PA, VA

Wisconsin IL, IN, KY, MI

Convenience of the Employer Rule

• “Convenience of the employer” rules:

– Assign payroll to the employer’s office even when employees

work from home, with only limited exceptions.

• States with “convenience of the employer” rule include:

– Arkansas, Connecticut, Delaware, Nebraska, New York, and

Pennsylvania.

• Rule upheld against constitutional challenges in Court of

Appeals of New York.– See, Huckaby v. New York State Div. of Tax Appeals, 829 N.E.2d 276

(NY 2005); Zelinsky v. Tax Appeals Tribunal of State, 801 N.E.2d 840

(NY 2003)

10

Special Pandemic Rules for WFH

• Monitor legislation and administrative guidance.

• Income tax withholding:– AL, GA, MA, MD, MN, MS, NE, NJ, PA, RI, SC, VT

– Local taxes: OH, MI, St. Louis, MO, Philadelphia, PA, Charleston, WV

• Corporate income tax nexus:– AL, AZ, CA, DC, GA, IA, IN, MA, MD, ME, MN,

MS, ND, NE, NJ, OR, PA, RI, SC, WI

• Sales and use tax nexus:– ME, MA, MN, NJ, PA, RI

11

Litigation of Pandemic Tax Rules

• New Hampshire v. Massachusetts, U.S. Supreme

Court Case Docket No. 22O154

– New Hampshire does not have an income tax.

– The State of New Hampshire filed an original complaint in

the U.S. Supreme Court against Massachusetts.

– Challenges imposition of Massachusetts income tax on

employees formerly working in Massachusetts but working

elsewhere (from home) during the pandemic.

12

Litigation of Pandemic Tax Rules

• Buckeye Institute, et al v. Kilgore, Columbus City

Auditor et al., Franklin County Ohio Common Pleas

Court, Case No. 20-CV-4301

– Ohio has a municipal income tax with hundreds of

municipalities imposing the tax.

– The Ohio Legislature provided a safe harbor for employers

to continue to withhold as they had done in the past during

the pandemic.

– Plaintiffs are employer and employees who want to change

withholding to the location of the employees’ residences.

13

Looking Ahead

• Fundamental issues– Federal and/or state legislation is needed

to address likely permanent increases in

teleworking.

– Employers should not expect legislative

relief in the short term.

– Employers and employees do not

necessarily have common interests in

deciding where to withhold.

– Employers need to look ahead despite

lacking certainty.

14

Proposed Federal Legislation

• Two bills are before Congress to provide some

guidance for employees:

– Multi-State Worker Tax Fairness Act of 202 (H.R. 7968), which

would establish a physical presence rule for income tax

purposes.

– Mobile Workforce State Income Tax Simplification Act of

2020 (H.R. 5674), which would create a 30-day safe harbor

for employees who work in other states.

15

Best Practices

• Review state tax profile

• Policies

• Recordkeeping

• Business solutions

16

Review State Tax Profile

• In addition to withholding issues, employers could

incur additional taxes due to WFH employees:

– Examples: Income, franchise, sales and use and even

new foreign taxes.

• Corporate net income or gross receipts taxes

– Nexus: Public Law 86-272 and De Minimis Activity.

▪ In-state agents soliciting sales of tangible personal property

do not create net income tax nexus for principal (employer).

▪ Does not apply to sales of services or digital products; gross

receipts taxes such as the Ohio commercial activity tax.

– Apportionment

17

Review State Tax Profile

• Sales and use taxes

– Post-Wayfair environment:

▪ Physical presence no longer required to establish nexus

o Some states continue to argue that physical

presence also establishes nexus

▪ Economic nexus and marketplace facilitator laws

o Passed in every state except Florida and Missouri

o Will sales tax nexus rules bleed into income tax?

18

Review State Profile

• Ways to trigger nexus:

– Sales

– Employees

– Physical assets

– Marketplace facilitator

– Storage of products

– Miscellaneous affiliates; internet activity including

marketing; “click-through” nexus; warranty repair

• Withholding places employer on the radar

19

Review State Tax Profile

• Unemployment insurance taxes

– Generally, employers only contribute in one state for any

one employee

– Four tests, in order of priority:

▪ Localization of service

▪ Base of operations

▪ Direction or control

▪ Employee’s residence

20

Review State Profile—Unemployment

(con’t)

• Interstate Reciprocal Coverage Arrangement (IRCA)

– For multi-state employees, 45 states have adopted

IRCA. Reciprocity Reciprocal

– Employers may elect to report and pay in one state for

a particular employee, provided that:

▪ (a) services performed, employee residence, or

employer place of business; and

▪ (b) the employer takes steps to obtain approval.

• Note: Tax withholding sourcing rules may differ from

unemployment rules.

21

Employer Policies

• Employers:

– Should consider whether new policies

regarding where employees can work

should be adopted.

– Be prepared to explain policies to

employees and the C Suite.

– Employ mechanisms to track locations

of employees and prepare for ongoing

dispersed workforces.

22

How Can You Use Technology to Help Track Reports and Calculate What Liabilities You May Have?

23

Track Report Calculate Remit

Track

• Ensure employee is in correct work and home

locations – down to the rooftop

24

Track

25

Report

26

Calculate

27

ABC Company, Inc.(ENT)

2000 Ultimate Way

Weston, FL 33312

888-555-1212

Pay Statement

Period Start Date 06/20/2020

Period End Date 06/26/2020

Pay Date 07/02/2020

Document 456454453

Net Pay $881.30

Pay Details

Siegfried Abreu

89 Straight

Cleveland, CA 32349

USA

Employee Number 708213741

SSN XXX-XX-XXXX

Job Sales Representive

Pay Rate $21.1500

Pay Frequency Weekly

Pay Group Salaried - Weekly

Location Columbus, OH

Division SOFT - Software Division

Department SLSMKT - Sales & Marketing

Region CEN - Central

Earnings

Pay Type Hours Pay Rate Current

Bonus-Salary 0.0000 $0.0000 $125.00

Overtime 8.0000 $21.1500 $253.80

Regular Pay 40.0000 $21.1500 $846.00

Total Hours 48.0000

Deductions

Employee Employer

Deduction Based On Pre-Tax Current YTD Current YTD

401(k) Def Comp $1,224.80 Yes $36.74 $36.74 $1.84 $1.84

Vision Plan $0.00 Yes $0.00 $377.00 $0.00 $494.00

Life Insurance $0.00 No $0.00 $2,184.00 $0.00 $2,288.00

PPO Medical $0.00 Yes $0.00 $546.00 $0.00 $650.00

STD $0.00 No $0.00 $0.52 $0.00 $0.00

Add'l Life Ins $0.00 No $0.00 $572.00 $0.00 $617.76

United Way $0.00 No $0.00 $1,000.00 $0.00 $0.00

Taxes

Tax Based On Current YTD

MA State Income Tax $820.62 $37.80 $37.80

Columbiana $125.00 $1.25 $244.61

OH State Income Tax $121.25 $4.24 $622.56

Federal Income Tax $1,188.06 $164.34 $3,069.39

Employee Medicare $1,224.80 $17.76 $370.44

Social Security Employee Tax $1,224.80 $75.93 $1,583.96

WI State Income Tax $246.19 $5.44 $5.44

Paid Time Off Net Pay Distribution

Account Number Account Type Amount

Check amount $881.30

Total $881.30

Remit

28

Employer Recordkeeping

• Time keeping records

– Default working location

– Override work locations

• Employee expense records

• Employee address

• Home

– Work Location

• Tax withholding statuses Income

– Other

29

HR Compliance Considerations for Remote

Employees

By the end of 2021, over half of the U.S.

workforce may work remotely multiple days of the

week.

30

Evolve your

onboarding

capabilities

• Simplify the process

• Digitize documents

• Standardize the

process and offer

individualized

support.

Focus on tax

withholding based

on ee’s remote

locations

• Consider regular

auditing of ee’s

remote work locations

• Stay on top of ever-

changing regulations

Ensure timely

delivery of HR

compliance forms

to employee’s

• Provide timely

electronic delivery of

new policy and HR

compliance forms

(i.e. tax and ACA

statements)

Focus on user

experience while

providing secure

platforms

• Offer official

security guidance

to your remote

employee’s

Business Solutions

• Employ the reciprocity agreements if applicable

and comply with the required documentation.

– This seems like the best solution at this time.

• Consider conforming to COVID-19 safe harbors.

• Track legislation and tax agency announcements.

• Examine all implications of a policy for withholding

and consider announcing a policy.

• Consider implementing a system to track

employees.

31

Contact for Questions

32

Matt HunsakerLeader of the State and

Local Tax Team

BakerHostetler

T +1.214.210.1214

mhunsaker@bakerlaw.com

Ted BernertPartner

BakerHostetler

T+1.614.462.2687

ebernert@bakerlaw.com

Dave EbersoleAssociate

BakerHostetler

T +1.614.462.2652

debersole@bakerlaw.com

Liz BuckoSenior Director

Compliance Products

UKG

T +1 404 312 2765

liz.bucko@ukg.com

Mike SemesOf Counsel

BakerHostetler

T +1.215.564.8270

msemes@bakerlaw.com

For questions regarding CLE and CPE credit, please contact lsonich@bakerlaw.com.

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bakerlaw.comThese materials have been prepared by Baker & Hostetler LLP for informational purposes only and are not legal advice. The information is not intended to create, and receipt of it does not constitute,

a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. You should consult a lawyer for individual advice regarding your own situation.