Massachusetts Changes Income Tax Rules (October 2020)

Massachusetts Changes Income Tax Rules for non-Residents effective 3/10/2020 relieving Massachusetts’ businesses of payroll changes.

Huh? The Commonwealth changes the rules which means employers don’t have to change? Exactly.

Let’s back up to about winter of 2020, it was snowy, commutes were long and parking lots were full. And all employees that worked in MA were taxed as MA residents. Employees that worked a portion of their time remotely could pro-rate their income tax on their personal returns. 

Example 1: Company ABC employs Nancy who lives in NH and works as a salesperson traveling around NH two days a week, but came into the office 3 days a week.

Company ABC lists Nancy as “works in MA” and withholds MA taxes.

At Tax time, Nancy can prorate her MA income tax at 60% provided she has kept detailed records.

Example 2: Company ABC employs Ryan who lives in RI and works as an accountant traveling to the MA office every day.

Company ABC lists Ryan as “works in MA” and withholds MA Income Taxes.

Conversely, if ABC employed Ryan to work full time in another state as an outside salesperson, ABC would need to register and collect/pay the other state’s income tax for him.

Fast forward through a very strange year full of face masks, hand sanitizer, and enhanced home WiFi to support multiple people on Zoom calls. The Commonwealth of Massachusetts has issued new guidance for employers for determining taxable status.  Effective 3/10/2020, compensation earned by out-of-state employees that worked remotely due to the COVID-19 state of emergency will be subject to Massachusetts Income Tax. This means employers don’t need to change employee’s “worked in MA” status for payroll purposes. Employees that used to prorate can continue to use the prior year’s proration on their personal income taxes.

Let’s revisit Nancy and Ryan. They remain listed as “works in MA” with MA Income Taxes withheld and paid on their behalf to the Commonwealth. Had Governor Baker not issued this regulation, ABC would have had to list Nancy as “works in NH” and STOP withholding MA taxes.  Similarly, ABC would have needed to complete a business registration in RI, list Ryan as “works in RI” and withhold RI Income taxes. Fortunately, the Governor’s regulation relieves employers from having to restate income taxes from the 9+ months of 2020 and 2021.

The regulation (830 CMR 62.5A.3) also provides a financial benefit to the Commonwealth. Since prior to COVID-19, more non-residents work for companies with MA based offices than residents that work outside of MA, the new regulation allows the Commonwealth to maintain its income tax base.

The regulation remains in effect until 90 days after the state of emergency is lifted.  Companies that have permanently transitioned to a remote-based work environment will need to revisit non-resident employees’ income tax designation by 90 days after the state of emergency is lifted. Companies should investigate business registration requirements now as many registration processes take time and employees who work full time out of state usually constitute nexus for payroll purposes.

But wait, there’s more.  The Commonwealth indicated in October that this regulation was in the works. The State of New Hampshire immediately filed a lawsuit against Massachusetts and 14 states have already come out in support of NH. The verdict? The case has reached the US Supreme Court, which is currently deciding whether they will hear the case. 

While there is nothing to change on employees’ statuses right now, changes may be coming depending on what the Supreme Court decides.

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