Teleworking: A Fixture For The Future? A Look At The Impact On Tax

If there is anything the coronavirus pandemic has shown, it’s that tens of millions of Americans working remotely has not brought about the fall of Western civilization. Yet its impact on the employment landscape should not be underestimated.

Some have observed that telework has been normalized in these times and predict that it will play an integral role in future employee work patterns. In turn, this new reality could have significant consequences for state individual income tax withholding and nexus laws.

Pre-pandemic, the percentage of employees telecommuting full time was 17%. In April, after the nationwide lockdowns forced employees from their offices, that number soared to 51%. If part-time employees are included during the April time frame, the percentage of employees working remotely jumps to 66%. 

These numbers have dropped substantially as restrictions have eased. According to the U.S. Census Bureau’s Household Pulse Survey, in October and November, 37% of employees aged 18 and over were working from home.

At the state and local level, however, the numbers look quite different. For example, over 66% of employees in the District of Columbia were telecommuting during the survey period; in Maryland, that number was just over 50%.

At the local level, the difference between the number of employees working from home varies widely, even within a state. In California, over 51% of the workforce in the San Francisco metropolitan area teleworked; in the Riverside metropolitan area, that number was approximately 32%.

According to Nicholas Bloom, an economics professor at Stanford University, the great “working-from-home” experiment has been a success in at least two ways.

In June, he said, “42% of the U.S. labor force [was] working from home.” Subtract the 33% of the unemployed, and that leaves “26% — mostly essential service workers — working on their business premises. So, by sheer numbers, the U.S. [became] a working-from-home economy. Almost twice as many employees [were] working from home as at work.”

Moreover, Bloom explained, “if we consider the contribution to the U.S. gross domestic product based on their earnings, this enlarged group of work-from-home employees [accounted] for more than two-thirds of U.S. economic activity.”

Without the switch to working from home because of the lockdown, “the lockdown would never have lasted. The economy would have collapsed, forcing us to return to work, reigniting infection rates.

Working from home is not only economically essential, it is a critical weapon in our fight against COVID-19 — and future pandemics.”

Bloom also foresees remote work becoming a permanent part of the employment landscape after the pandemic has passed. Indeed, he predicts the number of employees working from home to explode: “In 2018, the Bureau of Labor Statistics [reported] that 8% of all employees worked from home at least one day a week.” 

Bloom said he sees these numbers “more than doubling in a post-pandemic world. I suspect almost all employees who can work from home — which is estimated at about 40% of employees — will be allowed to work from home at least one day a week.”

He finds three reasons for this shift. First, when COVID-19 passes into history, “the fear of future pandemics will motivate people to move away from urban centers and avoid public transport. So, firms will struggle to get their employees back to the office on a daily basis. With the pandemic, working from home has become a standard perk, like sick-leave or health insurance,” he said.

Second, the investments made in technology will also drive the trend. “By now, we have plenty of experience working from home. We’ve become adept at video conferencing; we’ve fine-tuned our home offices and rescheduled our days. Similarly, offices have tried out, improved, and refined life for home-based work forces. In short, we have all paid the start-up cost for learning how to work at home, making it far easier to continue,” he said.

Third, the pandemic has altered the social perception of working from home. “The stigma from working at home has evaporated,” he said. “Before COVID-19, I frequently heard comments like ‘working from home is shirking from home,’ or ‘working remotely is remotely working.’ No longer.

All of us have now tried this, and we understand we can potentially work effectively — if you have your own room and no kids — at home.”

Bloom also noted that “a number of corporations are developing work-from-home plans beyond the pandemic.” In May Twitter gave its employees the option of returning to the office or working from home on a permanent basis. 

Also in May, the Federal Reserve Bank of Atlanta released the results of a survey of businesses across industry sectors that indicate that the share of full-time employee working days spent at home will triple.

Not surprisingly, the business services, information, finance, and insurance sectors will see a marked increase. In 2019 the percentage of full-time employees who worked from home at least one day per week was 17.6%. After the pandemic passes, that number is expected to rise to 43.4%.

The results from the construction, real estate, mining, and utilities sectors are even more surprising: In 2019 the percentage of full-time employees working from home at least one day per week was 2.3%, but after the pandemic ends, that number is expected to balloon to 32.2%.

Presumably, the work-from-home employees in these sectors will mostly be limited to front-office staff. Most striking is that overall, survey respondents anticipate that 10 percent of their full-time workforce will be working from home the entire five-day work week.

Withholding and Nexus Considerations

After then-President Trump declared the pandemic a national emergency in March, all states followed suit. With the sudden swell of employees working from home, several states with resident employees assigned to their employer’s office in another state granted relief to the employer’s requirement to withhold tax.

Thus far, many states that have granted such relief — including Alabama, California, and Rhode Island — continue to do so while the emergency order remains in effect.

Nebraska, which normally applies the convenience-of-the-employer rule for residents employed by a business located in another state, suspended the rule’s operation until its emergency order is lifted.

Wages paid to out-of-state employees working in Georgia during the pandemic emergency will not be considered Georgia income for withholding purposes.

Other states are not so forbearing. Illinois is adhering to its general rule that an out-of-state employer must withhold tax from a resident employee’s compensation if the employee performed her normal work duties in the state for more than 30 working days. However, the state will waive penalties for the employer’s failure to withhold if related to the pandemic.

For businesses, many states have also relaxed their nexus rules for both income and sales and use taxes. Indiana and Iowa announced that businesses will not lose P.L. 86-272 protections caused by a resident employee working from home because of the pandemic, nor will the states assert nexus over an out-of-state employer for that reason.

The District of Columbia will not assert nexus over an out-of-state employer for franchise and unincorporated business taxes caused by the presence of an employee teleworking in the District.

Mississippi and North Dakota will not alter an out-of-state employer’s apportionment factors based on the presence of a resident employee during the pandemic.

New Jersey is waiving the statutory impact of having employees in the state for corporation business tax purposes, as well as for sales and use taxes, if the business did not maintain a physical presence in the state.

Kentucky is not so generous on the nexus issue. The state has announced that whether an employee working in the state will create nexus for the out-of-state employer will be reviewed on a case-by-case basis.

The Future

Although it is gratifying to know that states are willing to forgo revenue during these uncertain times, what will happen once the emergency has ended?

The issue becomes more urgent if Bloom’s predictions come to pass. On withholding, it is highly unlikely that a state will require an employer to withhold if its employee works from home a few days in a month. That a state would require withholding for a resident employee teleworking full time isn’t even a question.

However, what if an employee teleworks from home two days a week? Would the state require withholding for an employee who works from home only eight days in a month? Because the employee’s office/home work schedule is recurring, it’s possible.

What about P.L. 86-272? Would a state assert that the employer loses its protections based on an employee teleworking two days a week? Would a state require a change in the out-of-state employer’s payroll apportionment factor? Would it assert sales and use tax nexus based on an employee’s two days’ home/three days’ office work schedule?

There are other considerations, such as cost of performance for sourcing receipts derived from services performed by a teleworking employee. Would the receipts be sourced to the teleworking employee’s location?

For scenarios such as these, would it be outside the realm of possibility that a state consider a de minimis standard for withholding and nexus?

Conclusion

It is beyond doubt that, for tens of millions of working Americans, the pandemic has turned daily work life upside down. Although the emergency will eventually pass, it will have left an indelible mark on the employment landscape and the way we work.

At present, many states have relaxed withholding and statutory nexus rules while the pandemic rages. After the emergency ends, while most employees will return to offices, many will not.

Of employees that do return to the office, it is possible that their employers will have in place a plan to allow them to telework. This work arrangement raises significant questions for employee withholding, as well as for an employer’s income and sales and use tax nexus with the teleworking employee’s state, as well as for apportionment and sourcing purposes.

While no one can know with certainty when the pandemic will burn itself out, perhaps states and businesses should be thinking and talking about how to deal with this new normal.