Managing Out-of-State Employees: The Payroll Tax Conundrum

As the COVID-19 global health event continues, employees across the country are still working at home and will likely keep doing so for the foreseeable future. If you have employees who live in a different state from where your business is located, this can create additional tax and payroll challenges.

Here's what you should know about managing payroll taxes for employees working out of state, with insights from ADP's recent webinar, Strategies for Surviving Year-End Reporting.

State income tax withholding

When it comes to tax withholding, payroll primarily follows the rules of the state where the work is performed. If employees who live out of state come to your business for work, payroll would follow the withholding rules for the state where your business is located. These employees may owe income tax to their state of residence. Employers often withhold partial amounts for the residence state in addition to the worked-in state, or in some cases, the employees handle that themselves when they file their personal income tax returns.

There is an exception when two states have a reciprocity agreement wherein the governments agree that residents only owe income tax to the states where they live, not where they work. If this applies to your workers, you should already be withholding taxes for the state where your employees live. Without a reciprocity agreement, taxes may need to be withheld in both the state in which work is performed as well as the residence state. Check with your state Tax or Revenue Department for details.

Income tax rules for working out of state

If your employees work from home in a different state for a number of days that exceed the established threshold for that state, the employer must generally recognize the change and begin to submit taxes to the state where the employee is working, not where the business is located. This threshold varies by state — for instance, in New York, it's 14 days, but in Illinois, it's 30. Other states have an income threshold or a combination of time and income.

Another factor some state governments consider is whether the employee is working from home for their convenience or as a necessity for their job. If it's for the employee's convenience, then tax withholding should be sourced for the state where the business is located. If working from home is a job necessity, then payroll is sourced through the employee's state of residence. But state laws and rules vary considerably on the specifics.

Before COVID-19, employers could avoid managing payroll taxes for employees working out of state by having everyone work on site. Now, safety precautions and stay-at-home orders may have forced your organization to account for a multi-state workforce, especially since the pandemic has pushed many employees beyond the temporary thresholds for working from home.

COVID-19 complications

If your business suddenly has employees performing significant out-of-state work due to COVID-19, you may need to register your business with these states to withhold taxes for these employees.

What complicates this matter is that state governments have taken different approaches to the crisis. Some have offered temporary guidance. Alabama and Georgia announced that they would not enforce their payroll withholding requirements for employees who are temporarily working from home in their states due to government-mandated stay-at-home orders.

As another example, Pennsylvania announced that if an employee is working from home temporarily due to COVID-19, the state will not consider that as a change to the sourcing of the employee's compensation. For non-residents who were working in Pennsylvania before the pandemic, their compensation would remain Pennsylvania sourced income for all tax purposes. For Pennsylvania residents who were working out-of-state before the pandemic, their compensation would remain sourced to the other state and they would still be able to claim a resident credit for tax paid to the other state on the compensation.

However, these rules may not apply depending on whether the states involved have a reciprocal tax agreement. Pennsylvania has reciprocal tax agreements with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia.

In addition, some states like Connecticut have ruled that employees working from home due to COVID-19 is a necessity for work, while others, like New York, have ruled that it is for the employee's convenience. These conflicting rulings mean your business could be in a situation where you need to collect withholding on behalf of two states for an employee working from home.

Another related problem deals with tax "nexus", which is the concept that where a business has an established presence in a state, it may be required to pay sales, income and other business taxes for that state. In some states, having employees working in the state is enough to establish nexus, which could lead to further tax compliance requirements for your business.

Again, some states have issued guidance to address the effect of COVID-19 and people temporarily working from home. Pennsylvania, for example, will not seek to impose Corporate Income Tax or Sales Tax nexus solely on the basis of this temporary activity. However, this guidance is only in effect until June 30, 2021, or 90 days after the emergency in Pennsylvania is lifted. In some cases, employers may need to assess whether remote workers are likely to return. If remote work locations are likely to persist, employers may need to consult with Legal and Tax advisors and register with any states in which a legal presence has been or will be established.

New legislation

Even with extra guidance, employers must navigate a wide range of possible laws and payroll requirements, especially if they have employees living in several states. To improve the situation, the federal government is considering legislation that would establish a uniform rule for employees working from home due to COVID-19.

The Mobile Workforce State Income Tax Simplification Act would standardize rules for tax withholding for cross-border employees. For instance, the act would set up a uniform threshold of 30 days of at-home work before withholding laws would apply. The HEROES Act and HEALS Act proposals both contain provisions for this issue as well, but Congress is still debating these bills.

Payroll compliance

Unless state laws are changed and/or the federal government standardizes the rules, employers need to understand and comply with their regional requirements around managing payroll taxes for employees working out of state. Organizations will also need to understand the possible nexus impact on their business. To accomplish these objectives, consider speaking with a legal and payroll expert who is on top of the latest state laws. They can help you update your payroll system to manage the new requirements as your employees continue working from home.

This story originally published on SPARK, a blog designed for you and your people by ADP®.

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Don't Be A Victim to IRS-Impersonating Scammers

Thieves use taxpayers’ natural fear of the IRS and other government entities to ply their scams, including e-mail and phone scams, to steal your money. They also use phishing schemes to trick you into divulging your SSN, date of birth, account numbers, passwords and other personal data that allow them to scam the IRS and others using your name and destroy your credit in the process. They are clever and are always coming up with new and unique schemes to trick you.

These scams have reached epidemic proportions, and this article will hopefully provide you with the knowledge to identify scams and avoid becoming a victim.

The very first thing you should be aware of is that the IRS never initiates contact in any other way than by U.S. mail. So, if you receive an e-mail or a phone call out of the blue with no prior contact, then it is a scam. DO NOT RESPOND to the e-mail or open any links included in the e-mail. If it is a phone call, simply HANG UP.

Additionally, it is important for taxpayers to know that the IRS:

  • Never asks for a credit card, debit card, or prepaid card information over the telephone. 
  • Never insists that taxpayers use a specific payment method to pay tax obligations. 
  • Never requests immediate payment over the telephone. 
  • Will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior written notification of IRS enforcement action involving IRS tax liens or levies. Don’t be intimidated by threats of immediate arrest. 

Phone Scams - Potential phone scam victims may be told that they owe money that must be paid immediately to the IRS or, on the flip side, that they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy. Other characteristics of these scams include:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves. 
  • Scammers may be able to recite the last four digits of a victim’s Social Security number. Make sure you do not provide the rest of the number or your birth date. 
  • Scammers alter the IRS toll-free number that shows up on caller ID to make it appear that the IRS is calling. 
  • Scammers sometimes send bogus IRS e-mails to some victims to support their bogus calls. 
  • Victims hear the background noise of other calls being conducted to mimic a call site. 
  • After threatening victims with jail time or driver’s license revocation, scammers hang up. Soon, others call back pretending to be from the local police or DMV, and the caller ID supports their claim. 

Don’t get hoodwinked by scammers. If you get a phone call from someone claiming to be from the IRS, DO NOT give the caller any information or money. Instead, you should immediately hang up. Call this office if you are concerned about the validity of the call.

E-Mail Phishing – Phishing (pronounced “fishing”) is the attempt to acquire sensitive information such as usernames, passwords, and credit card details (and sometimes, indirectly, money) by masquerading as a trustworthy entity in an electronic communication.

Communications purporting to be from popular social websites, auction sites, banks, online payment processors, or IT administrators are commonly used to lure the unsuspecting public. Phishing e-mails may contain links to websites that are infected with malware. Phishing is typically carried out by e-mail spoofing or instant messaging, and it often directs users to enter details into a fake website that looks and feels almost identical to a legitimate one.

Always remember, the first contact you will receive from the IRS will be by U.S. mail. If you receive an e-mail or a phone call claiming to be from the IRS, consider it a scam.

Do not respond or click through to any embedded links included in the e-mail and don’t open any e-mail attachments. Instead, help the government combat these scams by forwarding the e-mail to This email address is being protected from spambots. You need JavaScript enabled to view it..

Unscrupulous people are out there dreaming up schemes to get your money. They become very active during tax season. They create bogus e-mails disguised as authentic e-mails from the IRS, your bank, or your credit card company, none of which ever request information that way. They are trying to trick you into divulging personal and financial information such as bank account numbers, passwords, credit card numbers, Social Security numbers, etc., they can use to invade your bank accounts, make charges against your credit card or pretend to be you to file phony tax returns or apply for loans or credit cards. Don’t be a victim.

Imagine your return being e-filed and it gets rejected as already filed. You attempt to get a copy of the return but can’t because you don’t have the ID of the other unfortunate taxpayer who was used as the other spouse on the return. All the while, the scammers are enjoying their ill-gotten gains with impunity.

STOP-THINK-DELETE

You need to be very careful when responding to e-mails asking you to update such things as your account information, pin number, password, etc. First and foremost, you should be aware that no legitimate company would make such a request by e-mail. If you get such e-mails, they should be deleted and ignored, just like spam e-mails.

We have seen bogus e-mails that looked like they were from the IRS, well-known banks, credit card companies and other pseudo-legitimate enterprises. The intent is to con you into clicking through to a website that also appears legitimate where they have you enter your secure information. Here are some examples:

  • E-mails that appeared to be from the IRS indicating you have a refund coming and that the IRS needs information to process the refund. The IRS never initiates communication via e-mail! Right away, you know it is bogus. If you are concerned, please feel free to call this office. 
  • E-mails from a bank indicating it is holding a wire transfer and needs your bank routing information and account number. Don’t respond; if in doubt, call your bank. 
  • E-mails saying you have a foreign inheritance and require your bank information to wire the funds. The funds that will get wired are yours going the other way. Remember, if it is too good to be true, it generally is not true. 

We could go on and on with examples. The key here is for you to be highly suspicious of any e-mail requesting personal or financial information.

What’s in Your Purse or Wallet? - What you carry in your wallet or purse can make a big difference if it is stolen. Besides the credit cards and whatever cash or valuables you might be carrying, you also need to be concerned about your identity being stolen, which is a far more serious problem.

Thieves can use your identity to set up phony bank accounts, take out loans, file bogus tax returns and otherwise invade your finances, and all an identity thief needs to be able to do these things is your name, Social Security number, and birth date.

Think about it, your driver’s license has two of the three keys to your identity. And if you also carry your Social Security card or Medicare card, bingo! An identity thief then has all the information he needs.

You can always cancel stolen credit cards or close compromised bank and charge accounts, but when someone steals your identity and opens accounts you don’t know about, you can’t take any mitigating action.

So, if you carry your Social Security card along with your driver’s license, you may wish to rethink that habit for identity-safety purposes.

What You Should Never Do - Never provide financial information over the phone, via the internet or by e-mail unless you are absolutely sure with whom you are dealing. That includes:

  • Social Security Number – Always resist giving your Social Security number to anyone. The more firms or individuals who have it, the greater the chance it can be stolen. 
  • Birth Date – Your birth date is frequently used as a cross-check with your Social Security number. A combination of birth date and Social Security number can open many doors for ID thieves. Is your birth date posted on social media? Maybe it should not be! That goes for your children, as well. 
  • Bank Account and Bank Routing Numbers – These along with your name and address will allow thieves to tap your bank accounts. To counter this threat, many banks now provide automated e-mails alerting you to account withdrawals and deposits. 
  • Credit/Debit Card Numbers – Be especially cautious with these numbers, since they provide thieves with easy access to your accounts. 

There are individuals whose sole intent is to steal your identity and sell it to others. Limit your exposure by minimizing the number of charge and credit card accounts you have. The more accounts that have your information, the greater the chances of it being stolen. Don’t think all the big firms are safe; there have been several high-profile database breaches in the last year.

Fake Charities - Another fraud and ID theft scam associated with tax preparation involves charity scams. The fraudsters pop up whenever there are natural disasters, such as earthquakes or floods, trying to coax individuals into making a donation that will go into the scammer’s pockets and not to help the victims of the disaster. These same crooks might also steal your identity for other schemes. They use the phone, mail, e-mail, websites and social networking sites to perpetrate their crimes. When disaster strikes, you can be sure that scam artists will be close behind. It is a natural instinct to want to provide assistance right away, but potential donors should exercise caution and make sure their hard-earned dollars go for the purpose intended, not to line the pockets of scam artists. You need to be alert for this type of fraud.

The following are some tips to avoid fraudulent fundraisers:

  • Donate to known and trusted charities. Be on the alert for charities that seem to have sprung up overnight in connection with current events. 
  • Ask if a caller is a paid fundraiser, who he/she works for and what percentage of the donation goes to the charity and to the fundraiser. If a clear answer is not provided, consider donating to a different organization. 
  • Don’t give out personal or financial information—including a credit card or bank account number—unless the charity is known and reputable. 
  • Never send cash. The organization may never receive the donation, and there won’t be a record for tax purposes. 
  • Never wire money to a charity. It’s like sending cash.
  • If a donation request comes from a group claiming to help a local community agency (such as local police or firefighters), ask the people at the local agency if they have heard of the group and are getting financial support.
  • Check out the charity with the Better Business Bureau (BBB), Wise Giving Alliance, Charity Navigator, Charity Watch, or IRS.gov. 

Protecting Against Identity Theft - To give you an idea of just how big a problem identity theft has become for the IRS, it currently has more than 3,000 employees working on identity theft cases and has trained more than 35,000 employees who work with taxpayers to recognize identity theft and provide assistance when it occurs.

When ID theft happens, it becomes a huge problem for the taxpayer and the taxpayer’s tax preparer. So, the best way to combat ID theft is to protect against it in the first place and avoid becoming one of those unfortunate individuals who have to deal with it. Here are some tips to prevent you from becoming a victim:

  • Never carry a Social Security card or any documents that include your Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN). 
  • Don’t give anyone your own or a family member’s SSN or ITIN just because they ask. Give it only when required. 
  • Protect financial information. Check brokerage, IRA, 401(k), etc., accounts regularly to ensure your e-mail and street addresses haven’t been changed without your permission. 
  • Avoid using public wi-fi, especially when accessing financial accounts. 
  • Create strong passwords and keep them confidential. 
  • Check your credit report every 12 months. 

Secure personal information at home. 

  • Protect personal computers by using firewalls and anti-spam/virus software, updating security patches and changing passwords for internet accounts. 
  • Portable computers, tablets and smartphones can be stolen or lost. Limit the amount of personal information they contain that can be used for ID theft. Be extra vigilant against theft. 
  • Don’t give personal information over the phone, through the mail or on the internet without validating the source. 

If you do find you have been a victim of identity theft, contact our office immediately so we can notify the IRS and have a special ID PIN issued that you can use to file your tax return and prevent a thief from filing a fraudulent return under your ID. Also, call if you have any questions.

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New Survey Results Offer Insight Into the Minds of Non-profit Financial Leaders

A recent survey of investors yielded some surprising results about investment expectations for 2021. According to The NonProfit Times, the results show that non-profit financial leaders indicated that they are anticipating reduced investment gains this year. For more details, including investors’ top concerns for 2021 and a measure of organizations’ current optimism about the next decade, click here.

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OMB Extends Deadline for Some Single Audits

Some organizations facing single audits in 2021 were recently awarded some relief by the Office of Management and Budget (OMB). In response to circumstances related to the coronavirus pandemic, the OMB has granted a six-month delay for certain single audits. Click here to read a helpful Journal of Accountancy article that summarizes the recent OMB memorandum.

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New Data Sheds Light on 2020 Charitable Giving

Despite dour predictions about the ability of non-profits to thrive in the face of the pandemic, with data about charitable donations in 2020 now available, it seems that the opposite of those predictions was true. A recent article from The NonProfit Times examines the “2020 Fourth Quarter Report” from the Fundraising Effectiveness Project and discusses what it indicates about the last year for non-profits. https://www.thenonprofittimes.com/npt_articles/dollars-donors-study-shows-everything-up-in-2020/Click here to what the data says about 2020 and what it indicates for the future.

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