COVID-19's impact on withholding, unemployment insurance, and nexus.

• Author: Heroux, Mark

Being an employer comes with its own compliance requirements and challenges in normal day-to-day operations. This year has certainly added to those compliance requirements in light of COVID-19. Faced with stay-at-home orders, plummeting demand for their products and services, and general economic uncertainty, many businesses were forced to lay off significant portions or all of their workforce. Many employers found themselves juggling payroll tax payments and return due dates to free up cash flow. Others struggled with trying to maintain and manage their workforce by having employees work remotely, some with limited information technology and resources--and from their kitchen tables or living rooms.

Employer individual income tax withholding

Businesses with employees working from different locations than before the stay-at-home orders (i.e., employee's state of residency, parent's state of residency, second home, etc.) should first be aware that states generally have different thresholds of activity for registering and withholding employee individual income taxes. Wages are often subject to employer withholding in the state where they are actually earned. A handful of states are accommodating and do not require registration and withholding until an employee has been working there for 30 days or more; others require withholding from the first day wages are earned. The vast majority of states use periods that vary from two to 29 days, or after the employee meets enumerated earned income thresholds.

However, states with reciprocity agreements are an exception to the general rule. Reciprocity agreements commonly require an employer to register and remit individual income tax withholding to the employee's state of residency even if all work performed by the employee is in the reciprocal state. But if an employee earns wages at a business location outside his or her state of residence and no reciprocity agreement exists, then the employer ordinarily would need to withhold for the state where the employee's services were performed and the wages were earned.

State COVID-19 employer individual income tax withholding relief

Since employer wage withholding is a trustee tax, i.e., the taxes are collected by the business and held in trust for the state until remitted, extensions for filing or payment are not allowed by most states. However, some states did allow extensions of time to file and/or pay employee withholding, including Michigan (Michigan...