There has always been a small remote workforce, but for the past year the coronavirus (COVID-19) pandemic and the government-ordered shutdowns that followed made remote work very common. According to a recent survey by FlexJobs (, 65% of remote workers do not want to return to their offices, and many employers are continuing to use a remote work arrangement.

Having an employee working from home in a state where the employer is not headquartered creates several issues: where to withhold state and local income tax, and whether the remote workforce creates nexus such that the employer owes income or franchise tax to the remote state. It may also create income tax complexity for remote workers.

Pending court action

Late last year, New Hampshire ( brought a case against Massachusetts. Massachusetts created a temporary rule in 2020 to tax the income of New Hampshire residents who used to commute but now work from home. (New Hampshire does not have an income tax.) In effect, Massachusetts wants to tax income for services performed in another state. Whether the Supreme Court will hear the case remains to be seen. A May 2021 amicus curiae brief filed by the U.S. Solicitor General (, which reflects the Biden Administration’s position, urged the U.S. Supreme Court to not hear the case. But a number of states, including Connecticut and New Jersey, filed amicus curiae briefs urging the court to hear the case. Whether the Supreme Court hears the case now, or perhaps after there has been a state court decision, it surely highlights a growing problem for employers as more employees work remotely from states that are different from where an employer is located.

Basic Federal Payroll Tax Rules

For most federal payroll tax purposes, the location of the employer and employee is irrelevant. Federal income tax withholding applies regardless of their location.

Similarly, the Federal Unemployment Tax Act (FUTA) tax applies regardless of the location of the employer. However, the amount of FUTA tax paid can vary, based on location; this is because some states are deemed “credit reduction states” for FUTA tax purposes, which increases the amount of federal unemployment tax paid by the employer. Credit reduction states are listed in Schedule A of Form 940 ( Although there were no credit reduction states for 2020, there may be several in 2021. Therefore, determining to which state wages are allocated can impact the amount of FUTA taxes due.

State Income Tax

Withholding Each state has its own rules for income tax withholding (other than Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, where there is no income tax). For state payroll tax purposes, things get complicated when the employer and employee are in different states. Where should an employer withhold state income taxes?

Living and working in a different state.

Usually, an employer must withhold income tax in the state where the work is performed. But if an employee who resides in another state works exclusively in a state which is different from the employer’s state, then taxes are usually withheld only in the employee’s state. For example, if an employer is in State 1 but the employee lives and works exclusively in State 2, the employer should withhold income tax for State 2, assuming it has an income tax. There are, however, exceptions to this rule.

Living in the employer’s state but working in a different state.

If an employee lives in the same state where the employer is located, income tax withholding must be withheld for that state even though the employee works exclusively in another state. Connecticut, Delaware, Nebraska, New Jersey, New York, and Pennsylvania have a “convenience of the employer” rule, which states that if the employer requires the employee to work in another state (i.e., for the employer’s convenience), then withholding is only taken in the location where the work is performed. If, however, the employee chooses to work in another location—i.e., for the employee’s convenience—then withholding must usually be made in both locations. (The employee may escape double taxation via a state income tax credit.)

Temporary Payroll Tax Rules During the Pandemic

Some states made special income tax withholding rules to address this “temporary” situation during the COVID-19 pandemic. The Massachusetts rule, which is the subject of the lawsuit discussed earlier, says that nonresidents who were working in Massachusetts “immediately prior to the Massachusetts COVID-19 state of emergency,” but who are “performing services from a location outside Massachusetts due to a Pandemic-related Circumstance,” generally must treat income earned for those services as having been earned in Massachusetts [830 Mass. Code Regs. 62.5A.3(3)(a)].

Other states created different rules. For example, employees temporarily working in Alabama and Georgia due to COVID-19 were not subject to income tax withholding in those states in 2020. Several states, including Connecticut, deemed the pandemic to be “for the convenience of the employer,” which means any Connecticut resident who paid income tax to another state as a nonresident employee may claim a tax credit against Connecticut income tax (H.B. 6516).

Some states, including New York, have yet different requirements. “If you are a nonresident whose primary office is in New York State,” according to the Department of Taxation and Finance, “your days telecommuting during the pandemic are considered days worked in the state unless your employer has established a bona fide employer office at your telecommuting location” (

State Income Tax on Remote Employees

Some employees, such as professional athletes, work for short periods in other states and potentially face multiple state and local income taxes. Not only may they have to pay income tax on earnings within the state in which they provide services; they must also pay an allocable portion of all other income. For example, for someone who is not a resident of or domiciled in New York but has New York source income (i.e., wages for work within the state), state income tax is first calculated as if the employee were a full-year resident. Then an allocation is made based on the percentage of New York source income versus federal income.

Some members of Congress have been trying for several years to enact the Remote and Mobile Workers Relief Act (S. 1274), which would create a 30-day threshold before a state could impose income tax on a nonresident. The current pending measure would add a 90-day threshold for 2020 and 2021 for medical professionals and other workers who traveled to support areas hard hit by the pandemic.

Nexus for Income Tax on Employers

Payroll tax matters aside, having a remote workforce may subject employers to state and local income taxes on a portion of their profits. For example, when and to what extent does New York City’s unincorporated business tax (UBT) apply? Having employees in a location creates nexus to a state or locality, which may trigger state income or franchise tax in that location. Each location has its own rules on apportionment (how much income is to be taxed by a certain state); the employer’s payroll often figures into this computation.

During the pandemic, some states specifically waived nexus based solely on remote workers. For example, Connecticut enacted H.B. 6516 to provide: “The Department of Revenue Services shall not consider, in determining whether an employer has nexus with this state for purposes of the imposition of any Connecticut tax, the activities of an employee who worked remotely from this state during said taxable year solely due to COVID-19.” This applies only to the 2020 taxable year. New Jersey has a similar rule for purposes of its corporate tax ( Like Connecticut and New Jersey, states that created similar nexus waivers did so only for 2020.

Here to Stay?

Given the likelihood that remote work is here to stay, payroll and income tax issues will continue to be a concern to employers. A remote work arrangement also raises issues besides taxes, including workers compensation, employee benefits, and more. Employers and employees have a lot to think about.

Sidney Kess, JD, LLM, CPA is of counsel to Kostelanetz & Fink and a senior consultant to Citrin Cooperman & Co., LLP. He is a member of The CPA Journal Editorial Advisory Board.
Michael Sardar, JD is a partner of Kostelanetz & Fink LLP, New York, N.Y.

Adapted with permission from New York Law Journal © 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited; contact 877-257-3382.