How Do State Taxes Apply to Mobile and Remote Workers?

Prior to the COVID-19 pandemic, the focus of most mobility compliance programs was primarily on global mobility. For many companies, domestic (state-to-state) mobility compliance was an add-on or an afterthought. However, the pandemic led to a sudden increase in remote working with many employees deciding to work in a state that was different from the one in which they were employed. State mobility came to the forefront with several articles in prominent newspapers noting this phenomenon.

State taxing authorities took note. At the start of the pandemic, several states allowed tax exemptions for nonresident employees who found themselves trapped in that state during the initial shut-down. (Note: Some of this guidance was related to whether a remote worker trapped in a state during the shut-down would create a corporate tax presence for an out-of-state employer. This is an important issue but will not be addressed in this article). Some states, such as Hawaii, implemented programs to attract remote workers from other states in an effort to support local businesses whose incomes had been adversely impacted by a decimated tourist industry.

Guidance from state tax authorities

As the number of employees who moved to work remotely from another state or country became clearer, states began to realize that remote workers who had moved from another state were a good source of tax revenue. Many published tax guidance for remote workers and their employers.

In general, the tax guidance published by states was not surprising. The general expectation is that tax residents pay state income tax on all their income even if they are temporarily absent from that state. In October 2020, California published guidance noting that a temporary absence from California does not break residency. In fact, California ignores temporary and transient absences when determining residency. To be considered a California nonresident, an individual may need to take steps to change their residency, such as obtaining a new driver’s license or register to vote in the new state.

For nonresidents, the general rule is that they are taxed in a particular state on income earned in that state. Equity compensation is, generally, deemed to be earned ratably between grant and vest and for some states, from grant to exercise for stock options.

However, there are some states known as “convenience of the employer” states where, simply put, the employee is taxed based on employment location regardless of where the employee actually works. The New York tax authorities issued guidance that New York-based employees will continue to be subject to New York state tax even when working elsewhere unless the employer has a “base of operations” in that location.

The state tax authorities’ focus on remote workers remains. Several states, many of which are not known for mobility enforcement, have published guidance on remote work taxation including, for example, Kansas, Missouri, and Vermont. These states have published guidance on their websites for remote employee taxation and related payroll compliance.

What does this mean for employers?

AirInc., a company that helps organizations face workforce globalization challenges, found that 32% of respondents predicted that their domestic remote work would increase in 2022 (2022 Mobility Outlook Survey); therefore, it seems that state mobility will continue to be a topical issue. With the focus of many state income tax authorities shifting toward mobile and remote employees, employers can no longer ignore any state-to-state mobility.  Employers should review and address any payroll tax requirements for their remote employees. This could involve several steps:

• Implement a remote work policy, so that employees have awareness about potential work locations, approvals required, and payroll notification processes.
• Track employee remote work locations.
• Ensure HR, payroll, corporate tax, and stock administration are all aware of employee locations.
• Apply the correct income reporting and tax withholding for current and former states. This may seem easier to say than do, but there are many resources available to assist. Given the amount of focus on this topic, ignoring state mobility compliance is not advisable.

There are many considerations beyond payroll taxation, and the above is a very high-level outline.

For more information about state mobility taxation, see State Mobility Issues for Equity Compensation Professionals.