So what is a multi-state or multi-jurisdiction worker? The name says it all (thanks Captain Obvious), it’s when an employee lives or works in one state, and also works in another additional state(s), or additional local jurisdiction. The dilemma is: what is the correct way to tax these employees and what taxes fall under these conditions?
Employers often have employment tax withholding obligations for their employees. Failure to properly withhold and remit the correct taxes can result in liability on behalf of both the employer and the employee. However, in order to properly withhold and even know whether to withhold, an employer must first understand and be able to track where its employees are working. As companies move towards a remote-working environment, that challenge has become increasingly more difficult. It can be problematic for employers to gather remote working location information and then keep track of where their employees are located. To add to this conundrum, when employees in this flexible working environment move to a different state/jurisdiction, if they don’t alert their employer, they will continue to be taxed in their old location, which may require a change in tax withholdings. Additionally, employers that did not previously maintain a remote workforce and for whom it was generally unnecessary to track employee work locations may find unique hurdles to stay compliant.
Is there a Nexus?
The first step is to determine if the company has a nexus? Huh, what? What is a nexus you ask? That’s okay, I had to look it up as well. According to Wiki, a nexus is a connection. In the scenario of withholding taxes, the question is, ‘Is there a business connection between the employer and the state or locality’? To expand, it’s the amount of activity in, or connection with, a state or local jurisdiction that is necessary to do business as defined by regulations, state statutes, or case law. And to really make it fun, nexus standards vary from state to state. If the business is deemed to have a nexus, they have a tax liability for that jurisdiction because they have a presence in the state and thus are subject to state taxes.
Determining if an entity with a multi-state presence may have nexus is challenging and confusing, but as long as the imposition of taxation doesn’t violate the U.S. Constitution, an entity generally will have a tax nexus in states in which the entity has production activities, offices, facilities, multiple employees or sizable property. One such case is notable as an example. In Telebright Corp. v. Director, New Jersey Division of Taxation, 424 N.J. Super. 384 (N.J. Super. Ct. App. Div. 2012), the New Jersey Superior Court’s Appellate Division affirmed that an out-of-state employer was liable for the state’s corporation business tax (CBT) by virtue of having one employee telecommuting from the state.
Some states have fashioned nexus waivers due to the pandemic, where they explicitly stated that the presence of a remote employee working in the state solely due to the pandemic would not create nexus for certain taxes. “While temporarily beneficial to taxpayers, many of those waivers have already expired. For instance, Pennsylvania implemented a nexus waiver policy that expired on June 30, 2021. Therefore, employers that continue to maintain a remote workforce after June 30, will be considered to have nexus with Pennsylvania for the entire year ending after June 30, 2021. Similarly, New Jersey revised its administrative guidance setting Oct. 1, 2021, as the expiration date of its temporary nexus and withholding guidance.
Absent any special waiver, a remote employee can create a nexus for various taxes, including income taxes, gross receipts taxes, sales taxes, and local business taxes. In many cases the employee’s presence may amount to a nuisance tax, but compliance is still key to avoiding unwanted penalties and interest for failure to abide by a jurisdiction’s tax rules.
A remote employee could negate a company’s existing federal protections if the employee does anything more than solicitation within a particular jurisdiction. Therefore, it is crucial that companies consider what their remote employees’ job responsibilities are and whether remote work in a particular jurisdiction jeopardizes claims of federal law protections.” 1
Does the state or jurisdiction have reciprocity?
A reciprocal agreement between states means that if an employee works and lives in different states, the employee taxes can be withheld and paid according to the employee’s resident state so they aren’t (double) taxed on their income in both states. If no reciprocity agreement exists, then nonresidents generally have to pay nonresident income tax and file an income tax return. To help combat this scenario, many states have entered into reciprocal agreements to allow nonresident workers working in the reciprocal state to claim exemption from income taxes. This exemption is usually claimed via a nonresident withholding certificate and indicates that the employee living in one state and working in another state has a reciprocal agreement and has chosen to be exempt from withholding income taxes in their work state. Shameless plug: SmartTax W-4 supports ALL state nonresident certificates and exemption forms so employees can complete them online on any device (including their phone).
For states that don’t have a nonresident certificate to file, rules are built into PeopleSoft to determine whether the resident and nonresident states should be withheld on their wages.
2 + 2 = 5
The combination of nexus and reciprocity helps employers determine whether or not to withhold taxes from employees’ paychecks. If an employer does not have nexus with an employee’s state of residence, but there is a reciprocal agreement between the two states, then the employer must honor the reciprocity agreement and not withhold income tax for the state where the employee works. However, the employer is not obligated to withhold income tax for the state where the employee lives because the employer does not have nexus with the resident state (the employee in this scenario would have to make estimated tax payments).
So, what now?
Luckily, PeopleSoft NA Payroll handles most of the heavy lifting when it comes to the rules, validations, reciprocity agreements and state or local jurisdiction considerations; however it’s up to each employer to setup their business entities for each state and local jurisdiction. In years past, many of our customers were only setup to do business in 1 or 2 states, but now with remote workers and more complicated audits, employers are experiencing the individual challenges of keeping up with employees’ worked-in tax jurisdictions, which could now include any employee’s resident state and/or local jurisdiction.
The default rule for state and local income tax withholding is that taxes should be withheld for the jurisdiction in which the employee performed the services, and thus the company should register in that state and setup their PeopleSoft system to withhold taxes (setup doesn’t necessarily mean an employee would have withholding taken if they are exempt or have a reciprocity agreement) but, it’s still ‘Best Practice’ in most cases to assume that you have a nexus and should withhold while allowing the employee to request exemption or file nonresident certificates if they wish for the employer to not withhold their work state taxes. With PS WebSolution SmartTax W-4, employees have access to ALL federal, state and local withholding forms, including all exemption forms and nonresident certificates for the employees to complete online, on any device (yes, including cell phones) without the need for PDF. SmartTax will also even validate address data with US Postal Service integration and update an employee’s tax data when they change their Home address by inserting the new ‘Home’ state and any localities that are assigned to that home address.
For virtual and hybrid working employees or employees that work in multiple locations (states or multiple local jurisdictions), just gathering the data is complicated. With all the decisions stated above, how do you ask an employee if they live and/or work in a state that has a nexus or reciprocity agreements and to enter their correct tax codes and work distributions? And if you could accurately gather the information from employees or managers, how long would the process be to research that data and enter it correctly into the PeopleSoft system. What if an employee lives and works in Ohio 60% of time, but also works at an office in Pennsylvania the remainder of time. What tax codes for resident and work locations need to be applied for the employee’s home address and which tax codes apply for the remainder of work time in Pennsylvania?
Where is that information stored?
Which jurisdictions need to be setup in the Company/State or Local Tax Tables?
Which jurisdictions need to be added to the Tax Location Code in the Tax Location Table and in what order? Are they linked or not linked?
Which information from the Tax Location code should be present in Tax Distribution? Since multi-state/local tax locations must be manually added to Tax Distribution
What if the employee was hourly, how would you enter multi-state and local tax information into Tax Distribution since PeopleSoft allows only a single row at 100% for hourly employees.
All these questions and more……?
The final piece of the puzzle….
With PS WebSolution WorkSync solution, this multi-step process is fully automated. It begins with a simple, online, step by step wizard the employee completes to store their work information (addresses). The WorkSync solution then validates the address information for the work locations entered and a complex algorithm runs to gather and process all the state and local jurisdiction information necessary to complete the tax setup.
Once the tax codes are identified, they are added to the Tax Location table (where applicable) as well as the employee’s job/position data, tax data and tax distribution records. The administrative burden is reduced while also making the company compliant.
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By Tyger Vollrath
Tyger Vollrath is the Founder and COO of PS WebSolution. He has over nineteen years of experience in the PeopleSoft and is a frequent speaker and contributor of HCM content.