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Pennsylvania and Philadelphia Tax Updates: Considerations for Post-COVID Remote Working | Ballard Spahr srl

Summary

Businesses with employees in Pennsylvania and Philadelphia must be prepared to adapt to a post-COVID world, as temporary remote working guidelines expire and pre-COVID rules regarding withholding tax on employment and the link are applied.

The Pennsylvania Department of Revenue announced that effective July 1, if an employee is working remotely from their home, their home location should be treated as the employee’s workplace for the purposes of obtaining credit. its compensation and net corporate income tax and sales. tax link purposes.

As the pandemic restrictions are lifted in Philadelphia, the city’s payroll tax rules will apply to remote working arrangements. The City Department of Revenue has also announced that employees working remotely from their home in Philadelphia will be sufficient to give rise to a tax link between business income and revenue and should be considered when allocating revenue to business income, revenue tax and net profit tax purposes. .

Businesses with employees in Pennsylvania and Philadelphia must be prepared to adapt to a post-COVID world, as temporary remote working guidelines expire and pre-COVID rules regarding withholding tax on employment and the link are applied.

Pennsylvania

In the spring of 2020, the Pennsylvania Department of Revenue (DOR) announced that remote working of employees in the wake of the pandemic would effectively be ignored for tax purposes in Pennsylvania. If an employee was working from home due to the COVID-19 pandemic, the DOR did not treat this as a change in the origin of the employee’s pay. Therefore, for non-residents who worked in Pennsylvania before the pandemic, their compensation remained Pennsylvania source income for all tax purposes. Likewise, for residents of Pennsylvania who worked out of state before the pandemic, their compensation would remain paid in the other state.

As of July 1, 2021, the DOR announced that its previous directives no longer apply. If an employee works remotely from his home, that place of origin should be treated as that employee’s place of work for the purposes of obtaining his remuneration. Likewise, a non-resident employee who is required by his employer to work full-time remotely from his home in another state should treat his remuneration as non-Pennsylvania source income even if the employer is located in Pennsylvania and the employer is not required to withhold personal income tax from the employee’s remuneration.

Post-COVID Employment Tax Considerations

For people who live and / or work in a state with which Pennsylvania has tax reciprocity, this should have little practical effect. For example, in the case of an employee who lives in Pennsylvania and who – before the pandemic – worked in New Jersey, he likely would have suffered withholding tax in Pennsylvania before and during the pandemic and will continue to be subject to Pennsylvania personal income tax. .

However, for people who live and / or work in states where there is no reciprocity (for example, New York and Delaware), this change of place of work could lead to a change in the place where such a person is subject to tax. For example, a Pennsylvania resident who, before COVID, reported to an office in New York every day but now works from home will be deemed to have a workplace in Pennsylvania effective July 1, 2021.

Considerations on the Post-COVID Nexus

The DOR also announced that the pre-COVID corporate net income tax link rules will apply from July 1, 2021 –that is to say, the presence of employees in Pennsylvania working from home will be enough ― on its own― to link the net corporate income tax with the sales and use tax (regardless of economic thresholds) . Therefore, companies whose employees work remotely in Pennsylvania could have tax obligations because of those employees.

With respect to corporate net income tax in particular, Pennsylvania allocates income only over sales using market sourcing rules. Therefore, the mere fact that the employees are located in Pennsylvania cannot change the amount of income that would be subject to net corporate income tax. However, for companies without a physical presence in Pennsylvania, the DOR’s position is that a company has no connection with Pennsylvania unless the company has made $ 500,000 or more in sales in Pennsylvania. For companies with physical presence (for example, remote workers in Pennsylvania), the DOR’s position is that the $ 500,000 threshold is inapplicable. A company with a physical presence is subject to net corporate income tax unless its activities are protected by PL 86-272, which law prohibits a state from imposing a net income tax on companies. income earned within its borders from interstate commerce if the corporation’s sole business activity within the state is soliciting orders for the sale of tangible personal property.

Therefore, while there may be questions regarding precisely which jobs an employer performs in Pennsylvania that should cause a business to be related, as of July 1, 2021, businesses with remote workers who work in Pennsylvania can no longer count on the $ 500,000 threshold to avoid corporate net income tax reporting requirements.

Philadelphia cream

The response to the pandemic from the Philadelphia Department of Revenue (the Department) was similar, but not identical, to that of DOR.

Like the DOR, the ministry has issued guidelines stating that remote working should not be considered for corporate tax purposes. The Department announced that when they search for receipts in and outside of Philadelphia for the purposes of the Business Income and Revenue Tax (BIRT) and the Net Profits Tax ( NPT), BIRT and NPT taxpayers should treat employees who worked from home solely due to COVID as though they were still working from their offices before the pandemic, i.e. Philadelphia for employees with offices in Philadelphia.

However, the department also announced that for payroll tax purposes, non-resident employees are only subject to payroll tax if they actually work in Philadelphia. The department has traditionally used an “employer convenience” rule under which non-resident employees who are based in Philadelphia are subject to payroll tax unless they are working remotely for the convenience. from their employer (for example, a non-resident employee who works from home one day a week for personal reasons is subject to payroll tax in respect of his salary even if he works from home).

The Department issued a useful set of FAQs apply this rule to remote work related to the pandemic. These FAQs made it clear that when workers work from home due to an employer policy that materially limits their ability to enter the office, non-resident employees are only subject to payroll tax for the days spent actually working in Philadelphia.

Post-COVID Employment Tax Considerations

In light of virtually all of the pandemic-related restrictions now lifted in Philadelphia, employers should consider how the department’s rules will apply as workers begin returning to their Philadelphia offices with some frequency. .

It would appear that for employers who require employees to work remotely when possible and require employees to complete health certificates and request permission to enter the office, non-resident employees do not. would still be subject to payroll tax only on wages paid for time. actually moved to Philadelphia. But, if working from home becomes purely voluntary and offices reopen, the department’s position will likely be that Philadelphia-based non-resident employees are subject to tax on all wages, even if those employees choose to work at home. distance for a significant portion of the time. Employers should review flexible arrangements (that is to say, work policies that allow employees to work a few days from the office and a few days from home) to ensure that these arrangements are clear and support a position that time worked from home is for the convenience of the home office. employer, rather than for employee convenience.

Employers should also consider how they communicate these policies to employees to best document a position that withholding tax from non-resident employee wages for work performed outside of Philadelphia is not required or that payroll tax refunds may be available for employees from whom payroll tax is withheld.

Post-COVID Link and Distribution Considerations

The Ministry recently announced the “end dates” for its COVID-related business tax guidelines (announcement is available here).

As of July 1, 2021, the Ministry will apply pre-COVID nexus rules for BIRT purposes. Therefore, effective July 1, 2021, a business entity will be considered related for BIRT net income tax purposes when it has one or more employees carrying on business on its behalf in Philadelphia. If a company has employees working remotely from their home from Philadelphia, those employees will be enough to bring an employer into BIRT, unless their activities are protected by PL 86-272.

The department also announced that the pre-COVID dispatch rules will apply to activities in Philadelphia from June 10, 2021, when the governor’s declaration of emergency expired. Therefore, for the purposes of finding receipts for BIRT and NPT, the business activity of an employee working remotely from their home in Philadelphia on or after June 10, 2021 will determine whether the receipts are taxable receipts for the purposes of BIRT and NPT.

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We will continue to monitor the Pennsylvania and Philadelphia guidelines regarding the tax implications of remote working as COVID-related restrictions expire and employers and employees have more choices regarding remote working.


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