Arkansas ends the convenience of employer test
TAX ALERT |
On April 30, 2021, Arkansas Gov. Asa Hutchinson signed Senate Bill 484, effectively ending the state’s so-called ‘convenience of the employer’ test used to determine taxation of nonresident employees. The law specifically provides that remote workers are subject to income tax based on where they are located when performing the work. Senate Bill 484 became effective with the governor‘s signature and applies to tax years beginning Jan. 1, 2021.
In February, 2020, the Department of Finance and Administration issued a legal counsel opinion stating that Arkansas law required the convenience of the employer test. In that opinion, the department concluded that a nonresident performing remote work for a company located in Arkansas was required to pay income tax in Arkansas. The department determined that an employee of an Arkansas-based company who worked entirely from her home in Washington state was subject to Arkansas personal income tax on 100% of her compensation. Issued around the onset of the pandemic, the opinion was met with much criticism considering the rapidly expanding remote working dynamic.
The new law is a clear rejection of the convenience of the employer test. It provides that a nonresident pays Arkansas income tax only on the portion of the individual’s income that reasonably can be allocated to work performed in the state. It also states that a nonresident individual performs work in Arkansas when that individual is physically located in Arkansas when performing the work.
States generally tax income that is earned within the state. Five states, Connecticut, Delaware, Nebraska, New York and Pennsylvania, use convenience of the employer rules to determine how nonresident remote employees should be taxed. The rule extends the reach of a state’s taxing jurisdiction beyond its borders when the employees are working out of state for their convenience (rather that the employer’s convenience).
Employers and employees should be aware of the various rules governing jurisdiction to tax remote workers. For employees, the convenience of the employer test could result in double taxation depending on the availability of credits. For employers, the rules can effect withholding requirements. Convenience rules are just some of the state income tax considerations for remote employees, especially with the growing permanency of remote working arrangements. Businesses with the remote employees should consult with their state and local tax advisors for more information.