The Convenience of the Employer Rule and COE States

Kaitlin Edwards | May 9, 2024

The Convenience of the Employer Rule and COE States

In recent years, remote work has transitioned from a niche option to a mainstream work mode, supercharged by the COVID-19 pandemic. This shift has changed where we work and how states collect taxes, introducing new challenges for employers and employees.

Enter the “convenience of the employer” rule, a regulation that, while aiming to simplify tax issues, has introduced the potential for double taxation for remote workers. Let’s discuss this rule’s impact and what it means for the modern workplace.

What Is the “Convenience of the Employer” Rule?

The “convenience of the employer” rule determines where remote employees owe income tax. Traditionally, if you worked in one state but lived in another, you’d only pay income taxes where you reside.

However, this rule throws a curveball: If you’re working remotely for the convenience of your employer, you might find yourself paying taxes in both your state of residence and the state where your employer is based.

Impacts on Remote Employees and Employers

For remote employees, this can mean facing tax obligations, potentially paying more to Uncle Sam than anticipated. On the other hand, employers must juggle additional administrative burdens, ensuring they’re correctly withholding taxes and complying with varying state laws.

A Patchwork of Regulations

As of now, a handful of states have embraced the “convenience of the employer” rule, each with its own twist on the regulation.

These states include:

  • New York
  • Arkansas
  • Delaware
  • Nebraska
  • Pennsylvania

All have adopted this rule in its classic form. Meanwhile, Connecticut, Massachusetts, and New Jersey offer their own versions, adapting to remote work’s unique challenges. These regulations underscore the sheer density of tax compliance in our increasingly remote workforce.

From Mosey’s vantage point, COE demands a strategic approach to payroll compliance. By identifying the requirements laid out by each state, Mosey simplifies compliance, allowing businesses to focus on growth rather than getting bogged down by the ever-changing tax code.

Whether you’re a startup founder in Silicon Valley employing a developer in New York or a small business in Chicago with sales reps across the Midwest, understanding and applying the “convenience of the employer” rule is important.

What Is the Purpose and Application of the Rule?

Why did the “convenience of the employer” rule come into being? It’s not about making life harder for remote workers or about states getting greedy. The rule was designed with a couple of key goals in mind. First, it aims to streamline the management of remote teams for employers.

Setting clear guidelines on where taxes should be paid helps companies better manage state tax laws. Second, it’s a safeguard against tax evasion, ensuring that income earned is taxed appropriately, no matter where the work is physically done.

This rule reflects the evolving nature of work. As businesses and employees enjoy the flexibility of remote work, the rule provides a framework to ensure that this new freedom doesn’t lead to confusion or missed tax revenue. It’s about finding balance in the digital age of work.

What Is the COE Rule for Compliance?

Understanding how to comply with the “convenience of the employer” rule can feel like solving a particularly tricky puzzle. Don’t worry, though, it’s manageable with the right approach.

The key is the COE test, which determines whether an employee’s home office qualifies as a bona fide employer office, potentially exempting them from double taxation.

The COE Test Explained

To pass the COE test, an employee’s remote work setup must meet certain criteria. The employer must have a bona fide need for the employee’s work to be performed at the remote location.

This doesn’t mean preferring to work from your cozy home office cuts it. It’s about whether your role necessitates being offsite. If the primary criterion seems too narrow, there’s more flexibility in the secondary factors. These include having a dedicated work area free from non-work distractions and used regularly for your job.

The rule is about where it makes the most sense for you to work from a business perspective.

Guidance for Compliance

For employees, this rule means understanding the specifics of your work arrangement and how it fits within the rule’s criteria. For employers, it’s about accurately determining where to withhold taxes, which can get complicated quickly when you have a team spread across different states.

Integrate your payroll provider into the Mosey platform to help identify the intricacies of work and home locations for employees to let us help guide you through the compliance maze with ease.

If it’s automating payroll tax account setup for a multi-state team, Mosey’s got your back. With our expertise and technology, tackling the “convenience of the employer” rule in tandem with all the other state and local compliance requirements is a breeze.

What States Implement the COE Rule?

The “convenience of the employer” rule is quite varied, just like the states it operates in. A handful of trailblazers have adopted this rule, each adding its own local flavor.

New York

The Empire State stands as a prominent advocate of the COE rule. If you’re working remotely for a company based in New York, the state’s tax authorities might be as interested in your income as they are in Broadway’s box office numbers.

Arkansas, Delaware, Nebraska, and Pennsylvania

These states join New York in embracing the COE rule, applying it with their own criteria and nuances. It’s a number of tax laws, with each state creating its own rules for compliance.

Connecticut, Massachusetts, and New Jersey

These states offer their own spin on the rule. Connecticut and New Jersey play a game of tax law chess, adapting the rule based on specific conditions, while Massachusetts temporarily adopted it for pandemic-era telecommuters. This shows that even tax laws can pivot in times of global upheaval.

The COE rule hasn’t gone without hitting a few legal snags. Courtrooms have become battlegrounds for debates over the rule’s fairness and constitutionality.

The Empire State has seen its share of courtroom drama over the COE rule. Taxpayers have thrown everything from the Commerce Clause to the Due Process Clause at it, trying to knock it down. So far, New York has held its ground, with the courts largely siding with the state.

Interstate Disputes

The rule has even sparked interstate legal challenges. For instance, New Hampshire versus Massachusetts became a headline-grabber when the Granite State took Massachusetts to court over its application of the COE rule to pandemic telecommuters.

The Supreme Court’s decision not to entertain the case left many telecommuters in a lurch, highlighting the challenges of applying state tax laws in our interconnected world.

Implications for Remote Workers and Employers

These legal tussles underline the ongoing debate over the COE rule’s reach and fairness. For remote workers, the implications are as real as the taxes they might owe — you could possibly face double taxation without clear guidelines or recourse.

Employers, meanwhile, are caught in the crossfire, tasked with deciphering these laws to withhold taxes correctly while also trying to offer flexibility to their teams.

From Mosey’s perspective, these challenges underscore the importance of staying ahead in the compliance game. We’re actively working to demystify state and local regulations for you.

Mosey turns the legal jargon and complex tax scenarios into clear, actionable steps, ensuring that you’re compliant and informed. Whether you’re facing the uncertainties of the COE rule or the aftermath of the latest court ruling, Mosey is your rock in the ever-shifting payroll compliance.

What Are Some Strategies for Managing COE Rule Implications?

If you’re an employer faced with the COE rule, it requires strategic thinking and proactive management.

Here’s how employers can stay ahead:

  • Stay Informed: The first step is to keep yourself current on the COE rule and its applications across states where your employees reside. Knowledge is power, and in this case, it’s also compliance.

  • Communicate Clearly: Make sure your remote team understands the implications of the COE rule. Clear communication can prevent misunderstandings and foster a culture of transparency and trust.

  • Leverage Technology: Use payroll and compliance platforms to manage and streamline the challenges of state tax laws. Automation can significantly reduce the administrative burden and minimize errors.

As for employees, if you’re a remote worker trying to manage the COE rule, here are a few strategies to mitigate its impact:

  • Seek Professional Advice: Consulting with a tax professional can provide personalized advice on managing your tax obligations effectively.

  • Explore Tax Credits: Investigate whether you’re eligible for tax credits in your home state for taxes paid to another state. This can often alleviate the burden of double taxation.

  • Consider Your Location: If possible, living in a state with no income tax could simplify your tax situation, though it’s not a feasible option for everyone.

In the shifting sands of payroll compliance and the COE rule, Mosey is your trusted source for clarity and efficiency. We understand the challenges employers and employees face in this new era of work. Mosey is your partner in complying with confidence.

Sign Up or Book a Demo with Mosey Today

Mosey simplifies state tax laws for employers, offering tools that automate identifying and managing compliance obligations. With Mosey, you can ensure that your payroll practices are current, no matter where your team members clock in from.

Mosey provides insights and resources for employees to understand how the changing regulations might affect them. Through integration with your employer’s systems, Mosey helps clarify your tax obligations, offering peace of mind in an often confusing area.

The COE rule doesn’t have to be a stumbling block for your business or your remote work lifestyle. With Mosey, you’re equipped to tackle these challenges head-on, ensuring compliance, simplifying processes, and, ultimately, fostering a more flexible and compliant remote work culture.

Book a demo or sign up now to get started.

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