Many organizations have had employees working from their home in another state for years. Others embraced remote work out of necessity during the COVID-19 pandemic. Either way, this work model now looms large on the radar of state taxing authorities, including the Pennsylvania Department of Revenue (DOR).
At the start of the pandemic, DOR issued guidance permitting employers essentially to ignore remote work for tax purposes. DOR instructed businesses to continue to treat remote employees as working in their normal location for purposes of withholding. That guidance ended June 30, 2021, and there is not yet any indication it will be reinstated due to the increased prevalence of virus variants.
With the special guidance in the rearview mirror, here is a refresher on Pennsylvania’s standard rules regarding remote work, since many employers may be dealing with them for the first time. There are four main concepts at play as we look at different scenarios:
- Pennsylvania taxes all the compensation of a resident individual regardless of where it is earned.
- Pennsylvania can only tax a non-resident individual’s compensation if it was earned within Pennsylvania.
- Because of #2, Pennsylvania has a “convenience of the employer doctrine” that can cause remote work outside Pennsylvania to be counted as Pennsylvania earnings. This doctrine considers days worked outside Pennsylvania to be counted as days worked in Pennsylvania if the non-resident employee performs services both within and outside Pennsylvania AND the days worked outside Pennsylvania are not based on the necessity of the company.
- Regardless of #2 & #3, Pennsylvania has reciprocal agreements with several states that make it so only the state of residency can tax that individual’s compensation. These states are Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia.
Let’s first take a look at two scenarios where employees work completely in other states. We will tackle scenarios where employees split their time between Pennsylvania and another state in a separate post.
Fully Remote Scenario: Pennsylvania employee moves to another state
Quite a few Pennsylvania companies now allow existing employees to move to another state as part of talent retention and employee satisfaction initiatives. Generally in this case, the employee will no longer be a resident of Pennsylvania, so the convenience of the employer doctrine may kick in to determine Pennsylvania compensation. There are several factors to determine where this employee’s compensation will be taxed, and therefore where the employer must withhold.
Example: Employee moves to Indiana. Because of the reciprocal agreement between Pennsylvania and Indiana, employer will only withhold Indiana tax, regardless of any other considerations.
Example: Employee moves to New York, the employer does not need the employee to be in New York and employee comes back to work in Pennsylvania periodically. Because the non-resident employee performs services both within and outside Pennsylvania AND the days worked outside Pennsylvania are not based on the necessity of the company, the convenience of the employer doctrine will count all days worked by that employee as Pennsylvania working days. The employer must withhold Pennsylvania tax on all of that employee’s compensation. New York may allow for reduced withholding to account for the credit the employee will be able to receive on their New York individual income tax return for tax paid to Pennsylvania.
Example: Employee moves to Washington state, company does not need the employee to be in Washington state and employee no longer comes to work in Pennsylvania but has a shared workspace available to them if they were to come. While a careful reading of the law indicates that the convenience of the employer doctrine should not cause this employee’s compensation to be considered earned in Pennsylvania because the employee does not work at all in Pennsylvania, DOR’s guidance shows they may consider this taxable. Consult a tax advisor to determine the risks of withholding versus not withholding Pennsylvania tax.
Fully Remote Scenario: Pennsylvania company hires employee in another state
Remote work allows Pennsylvania companies to cast a wider net for talent and hire employees directly in other states, meaning those employees may have no prior connection to Pennsylvania. DOR has provided informal guidance to the CPA community stating that these employees will not be subject to Pennsylvania tax under the convenience of the employer doctrine if the company is not providing the employee a place to work in Pennsylvania. This is welcome news, and employers should feel comfortable not doing Pennsylvania withholding for most remote workers, but it leaves some questions unanswered:
- What constitutes “a place to work in Pennsylvania”? Must it be a dedicated office or similar for that employee, or would hoteling at the company’s location count?
- What if the employee comes to work in Pennsylvania but not at a location of the employer, such as a customer/client location?
- Are there any de minimis rules that apply?
Have questions about withholding Pennsylvania income tax for fully remote employees? Contact your RKL advisor or reach out to our State and Local Tax team using the form below. Don’t miss the rest of our coverage on this topic, where we discuss employees who split their working time between Pennsylvania and another state.