PA Department of Revenue Issues Remote Work Guidance
Pennsylvania has issued new corporate income & sales tax guidance for companies that have employees that are working remotely. This new remote work guidance is effective July 1, 2021.
The revised guidance states that an out of state corporation which has a PA resident working at home after June 30, 2021, will have corporate tax nexus for 2021 unless the activity is protected by P.L. 86-272 (i.e. solicitation of sales of tangible property shipped from a location outside the state). A corporation is considered to have nexus in Pennsylvania for corporate net income tax purposes when it has one or more employees conducting business activities on its behalf in PA.
The guidance also provides that a business has nexus with PA for sales tax purposes if it maintains a “place of business” in PA. That includes, in part, engaging in any activity as a business within this commonwealth by any person, either directly or through a subsidiary, representative or an agent. A company which continues to have a Pennsylvania resident working at home after June 30, 2021, may have sales tax nexus for 2021 and future years based solely on the activities of that employee.
WM Wisdom:
This will directly impact non-PA businesses that have employees working from home in PA. These companies may now have a filing responsibility in PA for corporate income and sales tax.
The remote work guidance goes on to provide that a PA resident who is required to telework full-time from home in PA rather than the employer’s location outside of the state should treat their compensation as PA source income. According to the guidance, PA residents will not be able to claim a resident credit for tax paid to another state on this compensation.
A non-resident employee who is required to telework full-time from home in another state should treat their compensation as non-Pennsylvania source income even if their employer is located in Pennsylvania.
In addition, PA employers with remote employees should no longer be withholding PA tax on the compensation of employees working from home outside the state.
WM Wisdom:
Employers should revisit their remote work policies. If the company does not have a policy, one should be created. Is telework required of an employee? Is this in the employee’s job description? If not, it should be. If telework is optional at the employer’s discretion, then these rules may not apply.
What about reciprocal agreements?
Pennsylvania has signed reciprocal agreements with Indiana, Maryland, New Jersey, Ohio, Virginia, and West Virginia under which one state will not tax employee compensation, subject to employer withholding of the other state. The taxpayer must provide the employer with the appropriate form to notify them of their nonresident status. For example, a PA resident working in New Jersey will give the New Jersey employer a Form NJ-165, Employee’s Certificate of Non-Residency in New Jersey, which certifies the employee is a resident of Pennsylvania and that Pennsylvania’s income tax should be withheld rather than New Jersey’s income tax.
What if the employer does not withhold their resident tax?
In this case, an employee would have to file a return in their home state and pay any tax due and file a nonresident return in the state where taxes were withheld and request a refund.
WM Wisdom:
The employer and employee remote work rules are complicated. Each company has a unique set of facts that should be evaluated for compliance with the revised guidance.
Our tax team is available to discuss your corporate income and sale tax situation at any time. Please contact us to set up a convenient time to meet.
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