A half-century ago, tax withholding was one of the simpler issues for taxpayers and practitioners. A more mobile society makes state tax withholding more complicated today given the ease of conducting cross-jurisdictional business and the increase in teleworking or remote work arrangements.
Meanwhile, the web of inconsistent state and local income tax and withholding rules affect employees and employers. As the AICPA testified, the myriad state income tax withholding laws and varying de minimis exceptions make compliance difficult and time-consuming.
In the wake of the coronavirus pandemic, more employees are teleworking, and state income tax withholding is a larger burden on employers.
Pandemic telework state tax issues
Determining the jurisdiction where an employee owes state and local taxes has become complicated as work arrangements have changed drastically during the pandemic. In addition to owing income taxes in an employee’s state of residency, without specific relief, the employee may also owe income taxes in any jurisdiction where they may have worked.
The employee and employer may need to track all of the employee’s working locations. While some states issued guidance on withholding during the pandemic, that guidance has not been uniform or widely adopted. Additionally, whether a state has a reciprocity agreement may further affect withholding.
Regardless of reciprocity or pandemic guidance, employees may still have a state and local tax obligation, even if employers are not required to withhold.
Some states adopt AICPA recommendations
To address concerns with state income tax withholding during the pandemic, the AICPA developed recommendations for state CPA societies that want to advocate at the state level. Specifically, the AICPA suggested states allow businesses to continue to withhold income tax (and the employee income tax liability) based on the location of the employer for newly telecommuting workers instead of the employee’s location.
Using the location of the employer would help prevent a double tax when one state uses the convenience of employer test (AR, CT, DE, NE, NY and PA) to source wage payments and another state uses the physical presence standard. It’s possible that a resident’s state credit for taxes paid to another state may not cover all the nonresident state taxes paid.
The AICPA suggested state and local jurisdictions:
- Allow businesses to continue to withhold income tax in the state where an employer is located.
- Allow the employee who is temporarily telecommuting to continue to pay tax to the state where employer is located.
Thirteen states (AL, GA, IL, IN, MA, MD, MN, MS, NE, NJ, PA, RI and SC) have followed our suggestion in providing guidance. We hope more states will follow with similar guidance.
In addition, 13 states (AL, GA, IA, IN, MA, MD, MN, MS, ND, NJ, PA, RI and SC), DC and Philadelphia followed AICPA’s recommendation (for state CPA societies to advocate) that an employee working remotely in a state due to restrictions would not create nexus and apportionment for tax purposes. Additionally, five states (GA, IN, IA, MA and RI) have provided that newly remote workers (because of COVID-19) will not count against companies taking P.L. 86-272 positions.
To address this issue on a national level, the AICPA supports federal bipartisan legislation, S. 3995, the Remote and Mobile Worker Relief Act of 2020. The bill provides uniformity for nonresident state and local income tax withholding, and a reasonable de minimis exception from the assessment of state and local income tax in a jurisdiction in which an employee doesn’t reside.
The bill also provides businesses a framework to address the numerous state and local tax issues that have unavoidably arisen because of the changing location of employees during the coronavirus pandemic. With the increase of employees working remotely during the pandemic, the AICPA urged Congress to enact the legislation as soon as possible to ease our country’s nonresident state income tax withholding and compliance burdens.
Federal withholding issues and AICPA advocacy
The AICPA has worked on federal withholding issues as well. Over the past few years, taxpayers and practitioners faced challenges with the elimination of personal exemptions in the Tax Cuts and Jobs Act (TCJA). This change has complicated federal withholding on the new 2020 Form W-4 resulting in the IRS tax withholding estimator and FAQs. Many taxpayers did not have enough federal withholding for the 2019 tax year.
The AICPA provided feedback on the draft 2019 Form W-4, Employee’s Withholding Certificate, and urged the IRS to provide penalty relief for estimated taxes. The AICPA also supported federal legislation, the Taxpayer Penalty Protection Act of 2019 (H.R. 1300), that would have provided additional penalty relief.
With the pandemic and the July 15 filing and payment deadline, many taxpayers and tax preparers continued to struggle to calculate and pay tax payments and prepare and file tax returns.
In early July, the AICPA advocated for further IRS tax administrative and penalty relief:
- To automatically waive the failure to file and failure to pay penalties for the millions of taxpayers affected and working through the challenges the pandemic created.
- To provide an expedited process to help taxpayers establish or revise an installment agreement based on current financial circumstances to comply with their tax obligations.
- To delay collections activities at least 90 days after July 15, 2020.
The AICPA continues to track state tax guidance and to advocate on various issues related to the coronavirus pandemic. We will keep you updated as developments occur.
Eileen Reichenberg Sherr, CPA, MT, Senior Manager — AICPA Tax Policy & Advocacy, Association of International Certified Professional Accountants