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Do Remote Employees Open Employers to Claims for Different State Tax Laws?

    Client Alerts
  • December 14, 2020

My office sits a few miles from the North Carolina-South Carolina border. Many of our staff members work in Charlotte but live in and commute from South Carolina. During the COVID-19 pandemic, like many businesses, we have had employees working from their homes. These telework arrangements raise questions over whether employers have established a “nexus” for state taxation and related purposes in those states where employees reside.

A nexus means that the company has sufficient contacts with that state to subject itself to tax liabilities. The question of a sufficient nexus differs widely among states. Some states consider a few employees working from their jurisdiction to be enough to create a nexus, while others would not. As a result of the pandemic, some states (including South Carolina) passed temporary measures specifically stating that the presence of a teleworking employee in that state alone does not create a tax nexus. Others would look at the number of employees working there, along with other factors such as sales within the state.

If a sufficient nexus is found, the employer would be responsible for withholding that state’s income taxes from employee payroll, as well as for payment of unemployment and other taxes. Of course, these issues did not begin with COVID-19. Many employers have regional salespeople or other employees who work in different states, usually from a home office. However, the pandemic has greatly increased the number of employees working remotely, increasing the potential magnitude of tax liabilities. Employers should check with their tax and legal advisers to determine whether their telework arrangements subject them to tax liabilities in states beyond their place of operations.