When the COVID-19 pandemic hit and many employees were told to work from home, some of them decided that could mean working from their parents’ home on the Florida coast or an Airbnb in the Colorado mountains. As companies found that productivity did not suffer, many now allow employees more flexibility to work wherever they choose, whether that be a hybrid model with days in and out of the office or something more substantial like months in another location.
As discussed in our prior post, four main concepts guide Pennsylvania taxation of employee compensation – view those concepts here. In that post, we also covered scenarios where employees are fully remote. Here, we examine four partially remote scenarios in which Pennsylvania employees taking advantage of work model flexibility could create income tax complications for themselves and the company.
Partially Remote Scenario: Pennsylvania resident works temporarily in a reciprocal state
Organizations may employ individuals who have second homes in neighboring states with which Pennsylvania has reciprocal agreements. As a reminder from a related post, Pennsylvania has agreements with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia that say each state can only tax the compensation of its residents. Suppose an employee that lives and normally works in Pennsylvania now decides to work occasionally from their beachfront home in New Jersey. Because of the reciprocal agreement, New Jersey cannot tax that employee’s compensation, meaning employers do not need to withhold any New Jersey tax, just Pennsylvania tax.
Partially Remote Scenario: Pennsylvania resident works temporarily in a non-reciprocal state
This scenario does not trigger the convenience of the employer doctrine, as that only applies to non-residents of Pennsylvania, but it has its own complications for the company and the employee. Suppose an employee spends the summer working from Colorado. In this case, the employee is now subject to tax in Colorado, and the employer likely has a Colorado withholding obligation. It is imperative that employers track where employees are working, so the business can fulfill its tax obligations. In addition to the Colorado withholding, the employer should also reduce its Pennsylvania withholding for the employee to account for the days spent working elsewhere.
Partially Remote Scenario: Pennsylvania non-resident normally works in Pennsylvania, now also works from home in a reciprocal state
The convenience of the employer doctrine would normally be triggered because this scenario involves a non-resident, but the reciprocal agreement overrides that. For instance, if a Maryland resident works for an employer in Pennsylvania, Maryland tax should be withheld instead of Pennsylvania tax (presuming the employee provided you a REV-419 Employee’s Nonwithholding Application Certificate). The remote work change whereby the employee not only lives in Maryland, but also now works part-time from home in Maryland does not result in any change in tax withholding.
Partially Remote Scenario: Pennsylvania non-resident normally works in Pennsylvania, now also works from home in non-reciprocal state
The convenience of the employer doctrine applies here, and this time in a clear manner. In fact, this is arguably the exact reason the doctrine was written. Suppose a New York resident used to come to work at your office in Pennsylvania every day (during which time you withheld Pennsylvania tax on all their compensation), but now is going to work from home three days a week. Because of the convenience of the employer doctrine, you will be required to continue to treat all their compensation as earned in Pennsylvania and withhold on all of it. New York likely also will require you to withhold since the employee is now working for you in New York, but they may allow for reduced withholding to account for the credit the employee will receive on their New York individual income tax return for tax paid to Pennsylvania.
These scenarios should help employers differentiate between black-and-white remote work situations with clear rules for withholding procedures, and the murkier situations where it will be best to discuss facts and circumstances with an RKL advisor. Contact them directly or use the form below to discuss any tax implication of remote work.