June 4, 2018 Connecticut law affects income tax and withholding on certain telecommuters Under recently enacted legislation and effective January 1, 2019, Connecticut income tax is imposed on nonresidents who perform their services outside of the state for the convenience of the employee. The new telecommuter rule applies only when nonresident employees are residents of a state imposing a similar rule. (Public Act 18-49, Sec. 20(2)(C).) This new telecommuter rule will not apply to sources of income from a business, trade, profession, or occupation carried on in Connecticut other than compensation for personal services rendered by a nonresident employee, and does not apply to sources of income derived by an athlete, entertainer or performing artist, including, but not limited to, a member of an athletic team. Background Under the normal rules, nonresident income tax applies only to those wages that are earned for work performed within the nonresident state. For instance, if an employee is a resident of Louisiana and works one month in Arkansas, only wages earned for the one month in Arkansas are subject to Arkansas nonresident income tax (and Arkansas income tax withholding). Under the so-called convenience of the employer rule, some states make an exception to the normal rule for telecommuters who work outside of the state for the employee's own convenience. For these telecommuters, nonresident income tax is imposed on all of the wages paid by their employer. Example 1: Employee Margaret works from her home in Georgia for Ace Company, a New York employer. There is no compelling business reason why her work is performed from Georgia. Under New York's convenience of the employer rule, New York income tax is imposed on all wages paid by Ace Company provided Margaret spends a least one day in the calendar year within New York. Georgia resident income tax withholding doesn't apply because the wages were subject to New York income tax withholding. (Georgia Employer's Tax Guide (p. 12); Technical Memorandum TSB-M-06(5)I) The following states impose the convenience of the employer rule: — Delaware (2017 Delaware Schedule W) Connecticut teleworker implications Effective January 1, 2019, nonresident Connecticut income tax is imposed on all wages paid to employees working outside of state if (1) the state from which they perform those services is within Delaware, Nebraska, New York or Pennsylvania and (2) the work is performed outside of Connecticut for other than a bona fide reason of the employer. Example 2: Employee Jake performs services from New York for Wedge Co., a Connecticut employer. There is no substantial reason why he works from New York. All wages paid to Jake are subject to Connecticut nonresident income tax (and Connecticut income tax withholding). Jake's wages are also subject to New York resident income tax and income tax withholding; however, a credit is allowed for the Connecticut income tax withheld against the required New York income tax withholding. (New York Publication NYS-50 (p. 30)), Ernst & Young LLP insights Further Connecticut guidance will be necessary to confirm precisely how the convenience of the employer rule will be enforced. For instance, it is uncertain if at least one day of work within Connecticut during the calendar year will be required to trigger the rule. Connecticut businesses will need to identify telecommuters who will subject to the rule next year and prepare to implement the change in the nonresident and resident income tax withholding requirements beginning with wages paid on and after January 1, 2019. ———————————————
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