Finances and Taxes

My Employee Moved Out of State During COVID-19. How Will This Affect My Taxes?

Jenna Lee Business finance writer 
COVID-19 Relocation_ Employer Tax Considerations - Gusto

COVID-19 has changed the way the world works. To help slow the spread, many teams have gone partially or completely remote for the first time. As of May, around 70% of employees said they were working remotely at least part time.

And these changes may not be temporary—three out of four companies plan to permanently allow more remote work even after COVID-19 dies down.

Unsurprisingly, this newfound flexibility is causing many workers to reconsider where they want to live if they can work from anywhere. This is especially true in areas with high costs of living, such as the Bay Area. In fact, a survey conducted by Blind in May found that two-thirds of employees would consider leaving the Bay Area if they could work remotely. 

Regardless of why these employees want to move—whether they want to save money, take care of at-risk family members, or just live somewhere new—if an employee moves to another state even temporarily, it can have payroll implications.

Don’t panic—we’re here to answer all your questions about paying team members who are working out of state during COVID-19.

What should I consider if an employee wants to move to a different state?

There are a few main things to know if your employee moves out of state. (We cover the basics here, but check out our guide to paying remote employees for even more detail.)

1. You may have to withhold and pay taxes in that state.

This probably isn’t your first rodeo paying employees, but as a reminder, both you and your employee pay payroll taxes, and you’re responsible for withholding the correct amount from their paycheck. 

Generally, you withhold and pay taxes in the state where your employee works, regardless of whether you have an office there.

If your business has a physical presence—even if it’s just one remote worker—in a state, it usually creates a connection, or nexus, to that state. This typically means you have to register with that state’s tax authority and pay any applicable taxes.

So if an employee from your San Francisco office moves and decides to work from Oregon, you’ll need to withhold and start paying taxes to Oregon.

There are a few exceptions to this rule. 

  • If an employee lives and works in two states that have a reciprocity agreement, and if they fill out the appropriate forms, you may need to withhold state and local income taxes in their home state instead of their work state. Check this list to see if your employee’s situation qualifies.
  • If your business is based in New York, Nebraska, Pennsylvania, Delaware, or New Jersey, your remote workers could have to pay income tax in both their home state and the state you’re based in.

As you can see, the requirements can vary state by state—with additional exceptions during COVID-19. That’s why we created a breakdown of withholding rules by state.

2. You may have to register your business in the state your employee moves to.

If your employee moves, you’ll likely need to register your business with that state’s tax agency (and possibly the labor agency, unemployment agency, and local tax agency). In turn, you’ll need to follow the state’s pay and labor laws, including laws about minimum wage, overtime, pay stubs, paydays, breaks, and more.

Your responsibilities can vary based on where your employee decides to live and work, whether those states have reciprocity agreements, how long your employee decides to work out of state, and more. Don’t get too overwhelmed—a tax professional or payroll platform should help you navigate and stay compliant with all the state laws.

What if the move is only temporary?

Even if your employee is working out of state temporarily, you may still have to collect payroll taxes for their temporary work states. However, some states are making exceptions for employees who have temporarily moved because of COVID-19. It all depends on which state (or states) they work in and how long your employee works there. Check with the states in question to see how long the employee has to work there for you to be required to collect taxes for that state.

There hasn’t been federal guidance on how to treat temporary moves due to COVID-19. Accordingly, each state (and sometimes city) is handling them as they choose.

Some states, such as Pennsylvania, Indiana, Massachusetts, Mississippi, New Jersey, and Washington D.C., aren’t enforcing nexus for employees who temporarily moved because of COVID-19. Businesses in Minnesota and Maryland, on the other hand, may need to register in those states and adjust their withholding if an employee moves to either of those states.

Not every state has said whether they’ll enforce nexus for temporary remote employees. If the state your employee temporarily moved to hasn’t issued guidance, you may want to reach out and ask what your obligations are. Otherwise, if the employee is planning on working from another state for an extended or open-ended period of time, you’ll probably want to register your business in that state and make sure you follow their withholding requirements and tax laws.

What information do I need from employees who decide to move?

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Non-residency certificate: If an employee decides to live in one state, work in another, and wants to take advantage of the states’ reciprocal agreement so they only have to pay taxes in one state, they need to submit a tax exemption form (also called a non-residency certificate) for the state they now work from. They can get this form from their work state’s government website.

Form W-4 (optional): While some employers are requiring their employees to fill out an out-of-state income tax withholding form if they move to another state, this isn’t standard. Employees can also fill out a new W-4 with their updated address, but in general, they only need to submit a new W-4 if they want to adjust their withholding.

Updated address: Instead, simply confirm where they’re working. If they move to a new state and are working from home, ask for their new address so you can update your payroll system and ensure you’re paying the right amount of state taxes — and paying them to the right state — and complying with state laws.

Time frame: You’ll also want to keep track of a couple dates: (1) when your employee plans to move and (2) their planned return date, if applicable. It’s okay if their move is open-ended. Having an estimate of how long they’ll be in a different state will help you understand whether you’re likely to meet that state’s temporary exemptions or if you’ll have to register and pay taxes to their new home state. It’s okay if their move is open-ended, as long as you’re prepared to register in that state. 

Circumstances are changing constantly, so keep your notes and information updated.

Are there circumstances where I can’t pay an employee if they move?

Not really, but it bears repeating that if an employee moves to a state you’re not already registered in, you may need to register with that state’s tax agency and follow all the applicable wage and hour laws, among others. It’s up to you to decide what’s right for your business and team.

Are there other tax implications of employees working remotely?

If your employees move to (and work from) different states, you’ll likely need to withhold and pay taxes in multiple states. This could impact your total tax bill, since different states have different tax rates.

Plus, keep in mind nexus doesn’t just apply to payroll taxes—it also applies to sales and use taxes, income taxes, and franchise taxes. This means you could end up with a significant tax bill if you have extensive sales or other operations in any one state.

What about contractors?

In general, paying contractors is simpler than paying employees because you don’t have to withhold state payroll taxes for contractors—they’re responsible for their own taxes. This means even if they move and begin working in a different state, it probably won’t affect how you pay them.

One exception: If your contractor temporarily works in a state they don’t live in (this is called a nonresident state), you may need to collect backup withholding taxes in the state they’re working in. Check that state’s rules to see whether this is required.

As a refresher, here are the forms you’ll need when paying remote contractors:

  • Form W-9: You should have collected this from your contractor before they started working for you. If they move to another state, have them send an updated copy with their new address ASAP. You’ll use their updated Form W-9 to fill out Form 1099-MISC.
  • Form 1099-MISC: You need to fill out this form every year for each contractor you paid more than $600 in non-employee compensation over the course of the year and send a copy to both the contractor and the IRS. This form tells the IRS how much you paid the contractor in non-employee wages and helps your contractor file their taxes.

As always, keep accurate records of your payments and make sure you classify contractors correctly. It can be a confusing determination, but if you misclassify an employee as a contractor, you could be liable for severe penalties.

Bottom line

Allowing employees to work remotely can get complicated. If an employee decides to move to another state, you may need to register your business in that state and brush up on a whole new set of payroll laws. Multiply that by every employee who wants to move, and the complexity compounds.

However, now that employees have gotten a taste of remote work, many will expect flexibility going forward. In fact, a Gallup poll found that almost 60% of employees want to continue working remotely as much as possible even after the COVID-19-related restrictions are lifted. 

This means you may need to continue allowing remote work if you want to attract and retain the best talent—especially since big companies like Facebook and Twitter are fully embracing the shift to remote work.

Don’t worry—this doesn’t mean you’re doomed to keeping up with each state’s tax laws until the end of time. Payroll providers like Gusto can help you stay compliant while paying employees—no matter where they work.

Updated: July 13, 2020

Comments

  • Dominique Fernandez

    Do you know if there are exemptions for non-profits? For example, an employee of a non profit has moved to another state – will they also have to pay taxes of the resident’s work state?

    Reply
    • Gusto Editors

      Nonprofit organizations should follow the same guidelines as for-profit employers. Employers are generally required to withhold and pay taxes in the state where an employee performs work, but the specific requirements will vary based on where your employee decides to live and work. Take a look at our state-by-state guide and be sure to check state and local guidance for the most up-to-date requirements.

      Reply

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