By: Christine M. Zinter, Bullard Law
The confusion surrounding the status of Washington’s new LTC payroll tax law more appropriately referred to as the Long-Term Care (LTC) Services and Supports Act, has generated a flurry of activity at our Firm—the most pressing question being, “Should we be taking this tax out of our employees’ paychecks?” As such, now seems like a good time to review certain corporate and payroll tax issues that arise when employers find themselves with out-of-state telecommuting employees. In this particular instance, with Washington resident telecommuters.
Spoiler Alert for Oregon (and other non-Washington) Employers: If you have a Washington resident working from home in Washington, you are very likely subject to Washington registration and business licensing taxes, and your employee(s) subject to Washington payroll taxes and benefits such as Paid Family and Medical Leave, the new LTC tax (if it isn’t indefinitely postponed by the Washington legislature, which seems likely), and mandatory paid sick leave.
With the advent of COVID-19 and the Telecommuting Revolution™ (I just made up that term and hereby claim all trademark rights), many states took a “don’t ask, don’t tell” approach to handling questions of nexus for corporate licensing and business taxes. As things normalize, whatever that means in a post-pandemic world, employers should expect states to return to the traditional view that having employees working in their jurisdiction subjects the out-of-state employer to registration requirements and business taxation.
It also means your work-from-home telecommuters are likely subject to their home-state payroll taxes (like Washington’s new LTC tax) and entitled to other state-mandated benefits. This, in turn, means the employer has additional state withholding and tax reporting duties.
For the purposes of this news brief, we shall be speaking to the Oregon-based employer with Washington residents as telecommuters. However, the Washington regulations would be applicable to any employer outside of Washington whose telecommuting employees fit the statutory definitions of being “employed in Washington.”
Business Registration and Business Taxation
An Oregon employer with employees living and working from their homes in Washington should be aware of Washington’s nexus standard for the Business & Occupation (B&O) tax. RCW 82.04.067 defines a nonresident business entity to have a “substantial nexus” with Washington if, in the current or immediately preceding calendar year, the business:
1. Had more than $100,000 of cumulative gross receipts due to business done in the state of Washington; or
2. Had a physical presence in Washington “which need only be demonstrably more than a slightest presence.”
The regulation goes on to state that a person is physically present in Washington if the person has property or employees in Washington. Consequently, despite having no sales or business property in Washington, an employer with one individual telecommuting from their Washington residence could be subject to Washington’s B&O registration requirement and subsequent B&O tax liability. The same physical presence nexus also establishes a requirement for sales tax collection.
Workers’ Compensation and Unemployment Insurance
The Washington State Department of Labor & Industries (L&I) expects employers with employees who are “principally localized in Washington” to have an L&I account. A person is “principally localized in Washington” if they live and work from Washington, such as a telecommuter.[1]
Because your telecommuter is “principally localized in Washington,” the Oregon employer likely must secure Washington state workers’ compensation coverage. While Washington has reciprocal agreements with Idaho, Montana, Nevada, North Dakota, Oregon, South Dakota, Utah, and Wyoming, these agreements generally only cover employees who are temporarily working in Washington (see RCW 51.12.120, WAC 296-17-31009). Since telecommuting Washington residents may have no intention of physically returning to work in Oregon, or the occasional trips they make to their Oregon home base are incidental in nature, they may not qualify for benefits under an Oregon policy of insurance.
Similarly, for the purposes of Washington unemployment insurance, an individual has “employment in Washington” if he or she performs services wholly within or both within and outside of Washington, if the service is:
1) “Localized” in Washington; or
2) The service is not “localized” in any state, but some of the service is performed in Washington and
a. The base of operations, or if there is no base of operations, then the place from which such service is directed or controlled is in Washington; or,
b. The base of operations or place from which the service is directed is not in any state in which some part of the service is performed, but the individual’s residence is in Washington. RCW 50.04.110.
“Localized” within a state means the service is performed entirely within the state, or the service is performed both in and out of the state, but the service performed outside the state is incidental (e.g., temporary or transitory in nature or consisting of isolated transactions) to the individual’s service within the state (see RCW 50.04.120).
Employers with Washington residents working from home should familiarize themselves with this definition. The same language is used for the purposes of determining whether an employee is subject to Washington payroll taxes and other mandated state benefits.
Washington Payroll Taxes and Mandated Benefits
Washington does not have an income tax on wages earned in Washington and Oregon only taxes employees for income earned while in Oregon. That means that Washington residents who are now telecommuting to their Oregon job will not pay Oregon income tax on a day’s work from Washington. According to OAR 150-316-0165(3)(a), “physical presence is determined by the actual physical location of the employee performing the services and not by the location of the employer or the location where compensation is paid.” This may be welcome news for those who used to make the daily commute across the river.
However beneficial this reprieve from Oregon income tax is for the Washington telecommuter, the same Washington telecommuter, and therefore his or her Oregon employer, are subject to other Washington payroll taxes and benefit mandates such as Paid Family and Medical Leave (PFML), the LTC Services and Supports Act (if it is not placed on a lengthy hold while they re-visit the law in its entirety), and for most hourly employees, mandatory paid sick leave.
Both the Washington PFML regulation and the new Washington LTC Services and Supports Act use the same definition of “employment” as described above for the purpose of unemployment taxes (see RCW 50A.05.010(8)(a) and RCW 50B.04.010(9)). If your Washington resident telecommuter fits the definition of having “employment in Washington,” the Oregon employer should set up an account with the Washington Employment Security Department (ESD). ESD is the entity that collects wage and hour reports for the purposes of tracking employee and employer contributions for the Washington PFML program and, if it does not get postponed, the new LTC program.
Subject to RCW 50A.10.030, Oregon employers should be withholding Washington employees’ PFML premiums from their paychecks or paying these premiums on the employees’ behalf. Premiums through the end of 2021 were calculated on 0.4% of gross wages (not including tips) up to the Social Security cap, and the employee portion to be withheld is 66.67% of the premium. Employers with fewer than 50 employees in Washington are not required to pay the employer’s 33.33% portion of the premium. The premium increases to 0.6% on January 1, 2022, with the employee portion of the premium increasing to 73.22%.
While providing a detailed explanation of how the PFML plan works goes beyond the scope of this news brief, Oregon employers need to advise their Washington employee(s) of the availability of the PFML program, and to remind the employee of their potential qualification for benefits any time an employer becomes aware of a “qualifying event.” Briefly, a qualifying event happens when an employee misses work in order to care for and bond with a child younger than 18 following birth or placement for adoption; to care for themselves or a family member experiencing a serious health condition; or for certain military-connected events. Eligible employees are entitled to 12 weeks of paid family leave, 12 weeks of paid medical leave, or a combination of the two up to 16 weeks with partial wage replacement.
Like PFML, if a telecommuter is “employed in Washington,” the Oregon employer should begin withholding the state’s new WA Cares premiums (otherwise known as “the LTC tax”), though for the moment employers are not required to start submitting the premiums to ESD. The premium, paid in full by the employee, is 0.58% of gross wages without Social Security cap. Employees could have waived out of the program, but only if they had other LTC coverage in place prior to November 1, 2021, and applied for and received a waiver from the WA Cares program.
If these payroll tax and benefit obligations are a shock to you, you may also be alarmed to know that your Washington work-from-home employees are covered by Washington’s minimum wage act, which includes a provision that hourly employees earn at least one hour of employer-paid sick leave for every 40 hours worked as an employee in Washington (see RCW 49.46.210). While Washington’s program is similar to Oregon’s paid sick time regulation, Oregon employers should be aware that Washington does not provide a waiver for employers with fewer than ten employees—it is required that employers of all sizes offer paid sick leave.
But What If ….
The language used by the Washington legislature to define “employment in Washington” strongly suggests that a Washington resident working from home on a full-time basis is a Washington employee no matter where the employer’s base of operations sits. But what if a Washington resident is only temporarily working (albeit working full-time) from home pending the resolution of the pandemic? Or what if you, like many other employers, have decided to implement a hybrid work-from-home model going forward?
In order to answer that question, an Oregon employer should carefully consider the definition of “localized.” An Oregon employer could potentially argue that, even though still maintaining a full-time work-from-home model while we wait to see if yet another springtime wave follows the current winter omicron variant, it intends for service to be “localized” within Oregon and that the telecommuting allowance remains “temporary” in nature such that Washington telecommuting employees should not be considered Washington employees. It remains questionable, however, that somebody who has been working from home since April 2020 (almost two years with no end in sight) is only “temporarily” working in Washington.
An employer offering a hybrid work model has an even thornier determination to make—is service localized in Oregon and working-from-home in Washington only “incidental” and consisting of “isolated transactions?” Could an employer reasonably make this argument when a person routinely works from home two or three days per week?
Oh-oh!
If reading this has given you a horrible case of heartburn, and you can feel your heartbeat throbbing in your temples, don’t panic quite yet. As we stated at the beginning, the pandemic that created the Telecommuting Revolution™ also engendered a lackadaisical response on the part of regulators—most of whom are still working from home. But that does not mean that Oregon employers should continue to ignore the issue. As employer responses to the pandemic are becoming less like knee-jerk reactions to see us through, but more like “the new normal,” states will begin to take notice.
While this article addresses Washington laws, due to the Telecommuting Revolution™, employers could have employees logging in from all over the United States (or even internationally) with each state having a claim on that employee’s time. The employment law attorneys at Bullard Law would love to assist you in crafting well-designed telecommuting policies and help you to navigate tax implications of having out-of-state employees.
[1] Wash. State Dep’t of Labor & Indus., Out-of-State Employers and Out-of-State Workers, available at https://lni.wa.gov/insurance/insurance-requirements/do-i-need-a-workers-comp-account/out-of-state-employers-and-out-of-state-workers.
To learn more, contact Christine M. Zinter, Bullard Law: https://bullardlaw.com/people/christine-m-zinter/