Editor’s Note: While the state tax issues discussed below are important, employers should also consider their obligations under the FLSA.  The DOL has released guidance outlining its stance on whether remote workers must be paid for short breaks taken throughout the course of the day.  Pursuant to the DOL guidance, any break that is less than 20 minutes is compensable time if the employee is a non-exempt employee.  That’s true regardless of the purpose of the break.  The guidance is based on the principle that employees commonly take short breaks throughout the day regardless of whether they are located on site or remote–and that these breaks reduce fatigue and allow the employee to be more productive throughout the workday.  The DOL differentiates these short breaks from longer meal breaks, or longer breaks to handle household issues, such as making dinner or caring for children.  Note that this guidance only applies to employees who are not exempt from FLSA overtime requirements.  While the guidance does not have the force of law, it can be relied upon by courts in determining whether employers have complied with FLSA rules.¹

Countless employers permitted remote work arrangements for the first time in response to the COVID-19 pandemic in 2020. Due to the ongoing nature of the pandemic (and the realization that many workers are equally productive and even prefer to work at home), some employers and employees wish to continue some of these arrangements even as many workspaces begin to reopen in a post-pandemic environment. However, before employers allow employees to continue working at home, there are many state-level tax issues that must be considered. Employers should have plans and policies in place to prevent adverse tax consequences, both for the employer and employee.Application of state and local taxes is determined based on “nexus” concepts. Typically, there must be a substantial connection between a taxpayer and the state or locality that is attempting to tax an out-of-state taxpayer (assuming the taxpayer does not reside in the state). When all employees report to duty in a central location, this is rarely an issue—the location of the worksite controls which state and local taxes apply.

However, many remote workers live and work in neighboring states. Others have relocated to different states in reliance on pandemic telework arrangements. Remote workers can create the required substantial nexus by their physical presence while working remotely within a taxing jurisdiction even if the employer does not have a substantial connection to that jurisdiction.

Many states enacted emergency measures to prevent unintended tax consequences and clarify when employers were required to withhold state-level taxes during the height of the COVID-19 pandemic.

For example, Massachusetts enacted telecommuting rules that provided that wages paid to a non-resident employee working remotely due to the COVID-19 pandemic would be sourced according to the location where the employee performed work prior to the pandemic. In other words, during the pandemic, Massachusetts temporarily taxed income earned by nonresident employees of Massachusetts employers who were telecommuting for pandemic-related reasons. However, Massachusetts (and many other states) have now begun rescinding these emergency rules (as of September 13, 2021, Massachusetts state tax will apply if the work is actually performed in Massachusetts).²

In New Jersey, income is taxed where the employee actually performs the work. People working remotely for an out-of-state business from a home in New Jersey must usually pay New Jersey income taxes. However, an emergency pandemic rule waived this requirement—so that, for example, if a New Jersey resident worked remotely for a company in New York, the New York employer could continue to withhold income taxes as though the employee continued to work in New York. The emergency rule was allowed to expire as of October 1, 2021.³

Note, however, that many states (including New Jersey) offer a tax credit for income taxes paid in another state to prevent double taxation.

Planning Point: Some states have rescinded their emergency rules and others have extended those rules. Any employer who elects to permit out-of-state remote work should work closely with competent tax counsel to evaluate their particular withholding obligations, depending upon the employer’s location and the location of out-of-state remote workers as these state-level regulations continue to evolve.

Although many states offer tax credits to prevent double taxation, employers may be required to withhold state-level income taxes for employees working in a different state. Employers should carefully consider the administrative burden a new state or local tax obligation may have on a company remember, of course, that employers can be held liable for taxes that are not properly withheld.

In most states, the employer withholds for the state where the employee works (often, the employee must work in the state for a certain period of time for this withholding obligation to apply). Now, it is possible that the employer may need to withhold based on the employee’s residence (which is often also where the work is performed).

Planning Point: Some states have reciprocal agreements with neighboring states that must be analyzed (and may be controlling) when determining an employer’s withholding obligations.

If an employee works remotely for convenience reasons, states that have adopted a “convenience of the employer rule” that requires withholding based upon the employer’s location, regardless of whether the employee works from home outside of the employer’s taxing state.In other words, under the convenience rule, a nonresident taxpayer’s income is sourced to the employee’s physical location if the employee is working remotely because of necessity. On the other hand, the income is sourced to the employer’s location if the employee is working remotely for his or her own convenience.

Planning Point: Many experts have questioned whether days working from home due to the COVID-19 pandemic should be treated as “necessity” days or convenience days. The issue has yet to be fully resolved. Now that vaccines have become widely available, employers should pay close attention to this developing issue.

New York, Delaware, Nebraska, Arkansas, and Pennsylvania apply the convenience rule. Many other states opt to apply the convenience rule if the non-resident taxpayer’s state of residence applies a similar rule.¹

In New York, for example, days worked from an out-of-state residence during the pandemic were treated as though they had been worked in New York unless the employer had established an out-of-state office where the remote work was being performed.²

Many employees incurred significant expenses setting up home offices during the COVID-19 pandemic. However, remote workers are only entitled to claim a home office deduction if they qualify as self-employed individuals (for example, independent contractors).Prior to 2018, an itemized deduction was available for work-related expenses associated with the trade or business of being an employee. The 2017 tax reform legislation eliminated the deduction for “employment expenses” for 2018-2025.

Under current law, therefore, traditional W-2 employees cannot deduct their home office expenses regardless of whether they would otherwise qualify for the home office deduction if they were self-employed.

Planning Point: Under federal FLSA rules, employers cannot require employees to pay for work equipment and other unreimbursed expenses if that would cause the employee’s income to fall below the federal minimum wage or salary thresholds ($7.25 per hour or $684 per week).¹

Further, many states require employers to reimburse employees for certain remote work expenses.² A federal district court judge in California denied a motion to dismiss a proposed class action lawsuit against Amazon. The lawsuit focuses on whether Amazon was required to reimburse the employees for expenses related to work-from-home requirements. The employee in this case alleged that state employment laws required Amazon to reimburse employees for work-related expenses incurred because of pandemic-related work-from-home requirements after the California governor issued lockdown orders. The expenses at issue here include electricity, Internet and space-related expenses totaling between $50 and $100 per month.³

Planning Point: While the federal tax deduction is currently unavailable, some states, including California, provide a state-level deduction for unreimbursed employee expenses.

Self-employed taxpayers can deduct expenses associated with maintaining a home office on Schedule C if the office is used regularly and exclusively as the taxpayer’s principal place of business (if the office is within the dwelling unit). A home office deduction is permitted for self-employed taxpayers with separate structures if the office/workspace is used “in connection with” the trade or business.⁴

See Q 8741 for more information on calculating the value of the home office deduction.

No, not in every case. Employers are only required to grant reasonable accommodation requests under federal law if providing the accommodation would not pose an undue hardship for the employer. An undue hardship has been interpreted to include a “more than de minimis” cost to the employer.The direct monetary costs to the employer are relevant (considering the size of the employer and the number of employees who may request the remote work accommodation). However, the EEOC provides that a number of additional factors are relevant in determining whether the requested accommodation must be granted, in addition to the financial cost to the employer. Employers can also consider whether the accommodation would: (1) decrease workplace efficiency, (2) infringe on other employees’ rights, (3) compromise workplace safety, (4) require other employees to take on more than their fair share of hazardous work or (5) conflict with another regulation or law.¹

A Tenth Circuit case decided in 2021 held that a work-from-home or modified schedule is not a “reasonable” accommodation if the employee is unable to perform essential job functions as a result of the remote work arrangement.² The case illustrates the general rule that reasonable accommodation is only required if it doesn’t present an undue hardship for the employer. Employers today should ensure that the essential job functions required of each role are well-documented–remembering that it is also important to evaluate whether the accommodation would truly prevent the employee from performing those job functions.

In November 2022, the Eighth Circuit held that that an employee may be able to prove that remote work is a reasonable accommodation by showing that the employee had been successfully working remotely.  In this case, the employee was permitted to work remotely two days a week.  He requested additional remote workdays when his multiple sclerosis flared up.  The employer denied the request, stating that the employee was required to be present in the office to supervise underperforming employees as part of the essential job functions. The court, however, found that the employee may have been able to prove that remote work was a reasonable accommodation because the employee had been successfully supervising those employees on a remote basis. In the words of the court, “by allowing [the employee] to consistently work remotely aside from his medical condition, [the employer] implicitly demonstrated a belief that he could perform his essential job functions without being in the office all the time.”³

Employers who are considering more permanent remote work arrangements should also consider how those arrangements could impact their employer-sponsored health insurance offerings. When it comes to available health care providers, some employer plans are selected to provide the strongest offerings near the employer’s worksite. Remote workers may not have access to in-network offerings and could, therefore, be required to pay higher costs to out-of-network health providers near their new home offices.It is also possible that an employee who moves to another state due to the availability of remote work could lose their access to health care in the new state of residence, depending upon the terms of the health insurance plan in question. Employers may be required to establish multiple health plan options for employees in specific locations or select an insurance carrier with more widespread national coverage.

As an alternative, employers may wish to consider offering individual coverage health reimbursement arrangements (ICHRAs, see Q 448), which allow an employer to reimburse employees for individual health insurance premiums via the HRA structure on a tax-preferred basis.

Employers should also consider the impact of state and local leave laws where the employee performs work. Those laws may require the employer to offer paid time off based on requirements that differ from the employer’s primary business location. Note that the applicability of those laws are based on where the employee lives.¹