Employment Tax 2021 - Emerging Trends (Vol 2)
Employment Tax 2021 – Emerging Trends (Vol.2)
While there are many employment/payroll tax issues at hand, such as the impact of M&A transactions, continued lag-time when working on IRS issues and an increase in state/local audit and assessment activity, my number one question received still revolves around the issues of telework, nonresident withholding, workplace footprint, etc. As we move through 2021, many of those who believed they would be back in their offices right after Labor Day now may see that stretch out several months, or even longer. Is the hybrid workforce here to stay…who knows? Some are itching to get back into the office…some have adapted so well working at home (or at least they believe they have) that they never want to go back to an office again.
Most employers implemented temporary work from home/work from anywhere policies for their employees, and many states similarly developed relief provisions with respect to income tax withholding and state unemployment. While many states have eliminated this relief as their Executive Orders expired or were revised, employers are still struggling with how to adapt to a workforce that has been working remotely for the last year plus and the future path for such workers. Just a reminder that, as your organization moves forward with its employment footprint decisions, payroll tax compliance will be a tremendously important component to consider:
• It is your responsibility as the employer to know where your employees are working and to withhold, remit and report state/local income taxes accordingly. If your organization decides to adopt go-forward policies allowing for remote work to some extent, or completely, your employment tax position should reflect those changes and your payroll tax and HRIS systems should be in alignment. Note also that even pre-pandemic your mobile workforce was subject to the same state/local rules and treatment…this is not something that is new to the payroll tax world, just significantly enhanced.
• State income tax reporting and state unemployment insurance liability do not necessarily align with each other. While SIT is generally required in the jurisdiction where services are performed (with a few notable exceptions) SUI taxation may be defined differently through a series of “locality” tests. Many employers originally saw the move to telework as temporary and never shifted reporting accordingly. If it is now a permanent change to your work profile, your employment tax profile must also be adapted.
• Don’t forget about your local payroll-based taxes. Many jurisdictions, especially those in states like Ohio and Pennsylvania, have complex local tax requirements on top of their SIT system, impacting both locality residents and nonresidents. Localities can often be more aggressive than states in addressing their tax base, and they often take non-reporting very seriously and personally, so take a hard look at new resident and work addresses when provided by employees and adjust where necessary.
• A few states (and localities, hello Philadelphia) have formal regulations related to individuals who are (or were) assigned to primary work locations in their jurisdiction but have chosen or even been required to work from another state. This “Convenience of the Employer” or COE position, which requires taxation in a state where an individual may no longer work but is technically based, is being tested in many ways, particularly where the issue of exactly whose convenience is in question has become more convoluted. Two examples:
o On April 30, 2021, Arkansas Senate Bill 484 was passed and signed into law, retroactive to 1/1/21, effectively ending the state’s COE position. The law provides that remote workers are subject to income tax based on where they are located when performing the work, which could very well be outside of Arkansas.
o On June 21, 2021, the U.S. Supreme Court denied New Hampshire’s motion of leave to file a bill of complaint challenging Massachusetts’ COVID-related COE tax regulation (note – this regulation expires 9/15/2021). Massachusetts implemented a COE test for the COVID period which was challenged by New Hampshire, specifically as it effected NH residents who previously commuted to offices based in MA. Although this was a motion specific to the NH/MA position, many saw this as a potential challenge to COE overall, with likely impact to states such as New Jersey and Connecticut, bordering Pennsylvania and New York and subject to their COE positions.
A few employment tax/payroll considerations to keep front-of-mind:
• The opportunities afforded by the Employee Retention Credit, originally enacted as part of the CARES Act but updated through subsequent legislation, should be considered by almost every employer that experienced a significant business impact related to COVID in 2020 and into 2021. The analysis as to ERC eligibility is extremely facts and circumstances based but the refund can be a significant financial tool for organizations which struggled, or are still struggling, because of the pandemic. Refunds/credits available are now a maximum of $33,000/eligible employee, well worth exploring for almost all employers, but especially for small and mid-size organizations hit hard in 2020 and early 2021. I can help your organization in this review/recovery effort as well.
• With the depletion of state unemployment insurance reserves, states will be struggling with how to replenish funds. Most states implemented relief for employers for benefits related to COVID paid in 2020, but that relief will not protect most organizations going forward as the reserves must, at some point, be recovered. Not-for-profits paying out benefits on a reimbursement method have already been greatly impacted as they generally received only partial relief from COVID claims. Some states enacted tax recovery legislation, but the biggest hit to many employers may be on the Federal Unemployment Tax (FUTA) side from 2022 forward. State unemployment departments borrowed over $53B from the federal government via Title XII advances through August 3, 2021, led by California which has borrowed over $23B to date. If not repaid timely, those bills will come due, and taxpayers will foot that bill…
• House Bill H.R.429 and Senate Bill S.1274 were both introduced in early 2021 to address the mobile workforce issues and implement a consistent de minimis for nonresident withholding. Neither has progressed at this time.
All in all, a clearer path to payroll and employment taxation may lie ahead, but there will be twists and turns along that road. The past year plus has certainly seen a series of those twists, but with proper planning and a strong foundation, your organization should be able to move forward and adapt to the changing tides.