February 11, 2020 Arkansas ruling holds that a remote worker's wages are not subject to state income tax withholding In a legal counsel opinion, the Arkansas Department of Finance and Administration ruled that the wages earned by a remote employee providing clerical services out of her home for an out-of-state contractor are subject to Arkansas income tax but are not subject to Arkansas income tax withholding, corporate income tax or sales and use tax. The Department's counsel suggested that the out-of-state employer voluntarily withhold Arkansas income tax from the employee's wages (courtesy withholding), and if that is not possible, the employee could make estimated tax payments. (Arkansas Revenue Legal Counsel Opinion No. 20190514, February 3, 2020.) This ruling applies only to the taxpayer requesting it but is instructional of how the Arkansas Department of Finance and Administration may rule on the income tax withholding obligations of remote workers. Unemployment insurance The Department's counsel did not rule on the matter of unemployment insurance because that tax is administered by the Arkansas Department of Workforce Services; however, based on the facts provided, the employee is subject to Arkansas unemployment insurance because her work is localized in the state. Work is considered localized within a state if either:
Ernst & Young LLP insights Technology advances have made it possible for employees to take direction and control from business locations that are hundreds or even thousands of miles away. Due to real estate costs, concern for fuel emissions and energy conservation, and efforts to create a flexible work environment, businesses are increasingly adopting telecommuter policies. It is important to note that this Arkansas ruling is outside the norm of recent state income tax withholding enforcement trends. Most states contend that when work is primarily performed from an employee's home, the employee's home is a regular place of business. Accordingly, state resident income tax withholding and other employment and business taxes (e.g., unemployment insurance and sales/use tax) apply in the state of the employee's home office. (New Jersey: Telebright Corp., Inc. v. Director of Taxation; Virginia: Ruling of the Virginia Tax Commissioner, Document No. 14-158, August 28, 2014.) Some employers are faced with a more difficult dilemma when it comes to telecommuters. A handful of states, including New York, assert that work performed in another state by a telecommuter is considered work performed within the state unless the work was performed outside of the state for "the necessity of the employer and not for the mere convenience of the employee." In November 2003, a court upheld the New York Department of Taxation and Finance's position that a resident of Connecticut spending part of his time teaching at a New York City law school was required to pay New York state income tax on 100% of his earnings. (Zelinksy v. Tax Appeals Tribunal, November 24, 2003.) In another case, a Tennessee telecommuter spending 25% of his time in New York was also required to pay New York state income tax on 100% of his earnings. (Huckaby v. New York State Division of Tax Appeals, March 29, 2005.) Businesses with remote workers need to carefully consider the range of taxes that may apply due to an employee's maintaining a full-time home office within a state. For more information on these and other state income tax withholding matters, see our special report, Crossing US borders. ———————————————
——————————————— EY Payroll News Flash
| |||||||||
| |||||||||
