Virtual internships are here: Know the state tax consequences

Apr 22, 2020

One of the many consequences of the COVID-19 pandemic is that businesses are managing their workforces in dramatically different ways. Some of the workforce issues are well known at this point. The shutdown of the economy has led to massive lay-offs and furloughs. The closure of nonessential businesses and stay-at-home orders have led to millions of employees working remotely. There will be other workforce related effects of the crisis. One emerging issue involves internships. Thousands of American companies hire more than a million interns every year. Given the devastation of the economy, many companies will forego traditional internship programs in 2020 and 2021.  

But, many businesses will continue to hire interns. For some businesses, internship programs are essential. They provide a pipeline of new talent, particularly in competitive fields. For example, professional service providers, such as law, accounting and financial firms, hire a significant number of new employees through their internship programs. And, professional services is just one industry where the use of internships as a recruiting tool is widespread. In addition, many firms use interns, when possible, as part of the regular workforce, because their compensation costs are significantly lower than regular employees.

Despite the COVID-19 crisis and attendant economic downturn, many businesses will continue to hire interns in 2020. However, unlike traditional internships of years past, they are likely to bring interns on board remotely. This is particularly true in states that are likely to remain under stay-at-home orders into the summer months. And, as many companies reconsider the traditional office workspace, it is likely that businesses will utilize virtual interns even in states that lift economic restrictions. As the current situation continues to unfold, it is likely that interns will eventually visit home offices, but companies are discovering that many of their internship programs can be managed remotely at a lower overall cost. Accordingly, there is a very real possibility that the phenomenon of virtual internships will last beyond the current crisis.

Impact on state and local taxes

Using virtual interns presents several state and local tax issues. Like all remote employee situations, businesses will have to determine where, and in some cases if, they must withhold state and local income taxes. In general, personal income tax jurisdiction is governed by an employee’s state of residence or state of employment. The vast majority of states do not subject nonresident telecommuting employees to personal income tax. But, there are exceptions to this rule, as a small number of states will subject a nonresident employee of an in-state employer to tax on 100% of their wages if certain requirements are met. Navigating the application of this web of nonresident telecommuter personal income tax rules is particularly important in relation to interns, many of whom may not have had previous employment history or experience with personal income tax concepts such as dual-withholding and credits for taxes paid to other states.

In addition, the use of virtual interns could affect a company’s state tax nexus footprint. A company is generally considered to be doing business and subject to a state’s income and franchise tax laws if the company has employees, including virtual interns, working in the state. Accordingly, a company that does not have any offices or other operations in a state could find itself subject to the state’s income and franchise tax laws based merely on the presence of a virtual intern. Furthermore, the presence of a virtual intern can jeopardize the protection provided by Public Law 86-272, and can affect a business’ income and franchise tax apportionment formula. In addition, the presence of a virtual intern can create sales tax nexus.

For both withholding and nexus issues, employers of virtual interns should know that applicable state laws are in flux as a result of the economic crisis. Some states have issued guidance on the effects of remote employment on nexus and withholding, and many more states are expected to do so. However, such rules are expected to be temporary, which may result in disparate results based solely upon the dates of the internship program.  For more information regarding withholding and nexus in a remote employee environment, please see State income tax considerations for remote employees during COVID-19.


The RSM State and Local Tax group can assist employers in assessing the state and local tax ramifications of using virtual interns. Businesses employing virtual interns should consider the impact on their withholding requirements as well as on state tax nexus. Employers anticipating a large virtual intern class should consider developing a system of communicating important tax and benefit information, including coverage of withholding taxes, the availability of credits, and the virtual intern’s general tax filing requirements.

RSM contributors