Income Tax for Remote Sellers

We are all well aware that due to temporary closings of offices and businesses and stay-at-home orders issued across the United States during the Coronavirus pandemic, many businesses implemented temporary work-at-home options for employees. Many states announced temporary relief regarding a business's establishment of nexus solely because an employee is temporarily working in a different work location due to COVID-19. So, now that in some ways, the pandemic is over and there has been an adjustment period for businesses, remote employees are starting to create tax issues! 

States are moving to new and updated policies in regards to remote workers. Sometimes having consequences. 

States are setting new timelines

This is a hot-button issue and states are providing more clarity than in the past, and more people are aware. Employers have always had to worry and now employees do too.

For example, in Utah, the state legislature has approved a bill adopting provisions of the Multistate Tax Commission’s model legislation for taxing nonresident employees working temporarily in the state. The legislation would establish that nonresident employees must work in Utah for more than 20 days in a year before their wage income for work done in the state is subject to taxation.

Not all employees would be eligible for the protection, including professional athletes, prominent individuals who provide services on a per-event basis, and higher-paid “key employees” of businesses, among others. The legislation also modifies the state’s withholding rules so that employers obligated to withhold in the state don’t withhold taxes on income paid to their employees in Utah who qualify for the safe harbor provided by the bill.

Another example is in South Carolina, the temporary nexus and income tax withholding relief provided in 2020 to employers with workers temporarily working remotely because COVID-19 is "ending." SC has also updated its guidance on income tax for residents, non-residents, and everything in between. TAKE NOTE a nonresident of SC working in SC for more than half of any pay period may be required to pay income tax in that state. This means if you are working remotely for a month in SC on the warm beach, you are now subject to income tax.

Something that is important to take into consideration in all states is the impact these changes and updates will have on employees who regularly travel for work, those traveling and whose income exceeds the sometimes lower than expected wage threshold (ie, 130k in Utah), and those who are traveling while working as a “perk.”

COST vs. MTC

There are two groups that have released guidance and who advocate for their general guidance to be followed within the states when it comes to income tax nexus. The Council on State Taxation generally advocates more on behalf of businesses and the Multi-State Tax Commission more on behalf of states. 

Before we talk COST vs. MTC, it's important to note that even if states are not following either of these models, they are coming up with guidance for residents, non-residents, and everything in between. This impacts employers and workers. 

States have also provided other forms of relief by establishing reporting thresholds. Roughly half of the states currently provide a minimum days threshold, averaging around 15 workdays, before wages are subject to income tax or withholding. Of the states that do not have a minimum days threshold, most have a minimum dollar threshold for the portion of wages earned while in the state, which is often tied to the state’s personal exemption.

Some generalized comparisons between the MTC and COST guidance…

Multi-state tax commission guidance: (State focused)

• 20-day threshold

• Includes similar exceptions as COST. (athletes, etc.)

• The MTC proposal also has a high wage exception to the days-worked threshold for any employee whose total annual wages exceed an amount as determined by each legislature (the amount would generally be calculated based on the prior year's wages).

COST guidance: (Business-focused)

• 30-day threshold

• Similar exclusions to MTC

• Illinois, Louisiana, and West Virginia — have adopted the COST model legislation.

You may have heard or seen us say that income tax will be the next big battle for eCommerce sellers. While this isn’t the full story of why that is (learn more about that here), these changes are a factor of that.  If you have more questions about this or anything in regards to sales tax, please reach out at contact@salestaxandmore.com.

By: Ellie Moffat

This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.