Remote Work and Nonresident Income Tax Withholding
December 14, 2020 - Some Minnesota companies have Wisconsin resident employees working from home due to Covid-19. These employees may now have an unexpected tax liability when they file their 2020 Wisconsin income tax return if their Minnesota employer did not make any changes to their withholding.
Before Covid-19, Wisconsin residents employed in Minnesota were subject to Minnesota tax withholding. A Wisconsin employee included the wages earned in Minnesota on their Wisconsin individual tax return but received a credit for tax paid to Minnesota. Minnesota employers withheld Minnesota tax from such wages and were not required to withhold Wisconsin tax.
Wisconsin recently provided guidance on employer responsibility, or lack thereof, to withhold and source a remote employee’s wages to Wisconsin. Wages earned while working remotely in Wisconsin will be attributed to Wisconsin. Minnesota employers who don’t have nexus with Wisconsin are not required to withhold Wisconsin tax from these wages. Because the wages are considered earned in Wisconsin, they will not be taxed in Minnesota and there will be no credit for tax paid to Minnesota. Therefore, individuals may find they owe tax with their Wisconsin tax return. If the employer continued to withhold Minnesota tax while the employee worked from home, the individual will be due a refund on their Minnesota tax return as a result of this excess Minnesota withholding.
The related Wisconsin guidance can be found at the following links:
- Withholding Tax Update 2020, which changed the Wisconsin withholding tax requirements for Minnesota companies with Wisconsin employees.
- Wisconsin Tax Bulletin 171 (April 2011), page 13.
What can the employee do?
When preparing 2020 individual income tax returns, employees should be sure to tell their tax preparer the number of days physically worked in any state. Additional calculations may be necessary on the return to correctly report wages to states other than their home state.
Estimates may also be necessary for 2021 until the employee physically returns to work at the employer’s location if the employer will not be withholding and sourcing employee wages to the employee's home state.
All of a resident’s wages are taxable to their home state, so they will receive a credit for taxes paid to a nonresident state. The income sourced to the nonresident state will be determined by the number of days worked in a state divided by the number of days worked in 2020.
However, additional statements may need to be attached to the taxpayer’s nonresident state income tax return. These statements would substantiate the adjustment needed if their W-2 was prepared sourcing all of their wages to the state where they are not a resident.
If Minnesota rather than Wisconsin tax was withheld on the 2020 wages, the taxpayer may be due a refund with their Minnesota tax return, while owing tax with their Wisconsin tax return.
Filing a Minnesota tax return as soon as possible may allow taxpayers to receive their Minnesota refund prior to paying the balance due with their 2020 Wisconsin tax return.
What can the employer do?
Care should be taken to determine if the business has nexus with a state and how many employees are in that state working remotely, either temporarily or permanently. The business should be withholding from employees working temporarily from home if they already have determined they had nexus with the state.
Employers that need to make adjustments to the state wage and withholding reporting are advised to reach out to their payroll provider and/or review their payroll systems internally.
Employers still have time to adjust within 4th quarter 2020 prior to year-end close for state income tax and withholding reclassification. A reminder to employers when processing a change of this nature mid-year; it is recommended to perform an internal reconciliation of the quarterly state filings to the W-3 filing for state income tax and withholding.
Businesses are not required to start withholding income taxes from employees in states in which they do not have nexus, or when the other state has a reciprocity agreement with the state in which they do business.