State nexus issues have no doubt been extremely complex ever since the well-known Wayfair case. More recently, post-pandemic remote work has exploded and started raising some issues around state tax nexus issues, and not everyone agrees.
The ability of each individual state to make their own laws surrounding sales tax, income tax and other taxes makes interstate issues a full-time job for professional tax preparers.
Remote workers need to start by determining if their remote status is temporary or permanent. Post-pandemic the number of jobs that have stayed fully remote has been mixed with only some workers returning to in person work settings or even modified remote schedules.
Critically, workers could have state filing obligations in both the state they reside in, as well as the state their employer operates in. Each state has their own “trigger” point in terms of the number of days that an employee can work in the state before triggering a filing requirement. Some states may take 60-90 days of work in the state before an individual would be required to file there, however, New York, for example, requires an employee to file after only one day of work in the state.
To further complicate nexus rules, some states made exceptions for employees who temporarily relocated to the state during the pandemic to work remotely but then returned to their in-person work positions. Other states will look at why an employee is working remotely in order to determine filing requirements.
If employees are working remotely purely out of convenience, the state will require the taxes to be attributed to the state the business operates in, not the domicile state where the remote worker is located.
The ability of each individual state to make their own laws surrounding sales tax, income tax and other taxes makes interstate issues a full-time job for professional tax preparers.
Determining client filing requirements may very well require preparers to ask a few extra questions. Especially if you are preparing returns for individuals who are domiciled in one state but receiving a W-2 from an employer that lists another state. It would be prudent to ask the client questions about the number of days spent working in each state.
Additionally, professionals need to make sure they are aware of the nexus laws of each state in question or risk mis-advising the client as to what their filing requirements might be.
It is important to note that not every state requires employers to withhold taxes for the employee’s home state, or domicile state. Relying on W-2 withholdings to direct your nexus research will certainly result in missed filings. On the other end of providing professional service, preparers also want to look for credits on each state return for income taxes paid in another state to avoid double taxation of employee income.
