Tax and Talent: Post-COVID Payroll Nexus Challenges Arise

How well do you work with your colleagues in human resources (HR)?

More tax teams are about to find out as the challenges, complexities and ripple effects associated with payroll nexus multiply. 

Payroll nexus has posed challenges for some companies ever since knowledge workers began “telecommuting” in larger numbers about three decades ago. Following the massive mobilization to remote work that COVID-19 triggered in 2020, payroll tax challenges have taken on new, increasingly strategic implications for recruiting, retention, employee engagement and productivity, cost of living adjustments (COLA) and other important talent management activities. Right now, it looks as if remote working models largely will remain in effect throughout 2021.

As a result, more companies are wrestling with questions concerning who should be responsible for higher payroll taxes when remote workers move to certain locations and whether existing COLA adjustments should be recalibrated when remote employees leave high-cost cities for lower-cost areas. Some organizations are assessing whether salary reductions, pay scales, one-time bonuses and other compensation levers should be used to optimize relocation decisions. 

Spotify’s top HR executive recently told The Wall Street Journal that the audio-streaming company’s employees can maintain their existing compensation while working from anywhere within their current country. That pronouncement sounds a lot like a recruiting message, especially when other companies are considering reducing salaries when remote employees leave Silicon Valley or New York for, say, Omaha, Nashville or San Antonio. 

While helping their HR partners integrate payroll taxes into these compensation and talent management decisions, tax managers should emphasize that relevant tax rules and rates continually change – especially when tax issues get heated. 

That’s certainly the case with payroll taxes, just ask New Hampshire and Massachusetts. The Granite State has claimed that Massachusetts’s taxation stance on non-resident remote workers violates the federal commerce and due process clauses by taxing New Hampshire residents for work performed entirely in New Hampshire. 

In late January, the U.S. Supreme Court invited the U.S. solicitor general to file a legal brief expressing the views of the United States regarding New Hampshire’s motion for leave to file a bill of complaint in New Hampshire v. Massachusetts. 

(It’s important to note that this isn’t just a battle for the states—it could also impact larger cities with a higher wage tax than the suburban areas where people are now physically working.)

The case’s outcome could have long-lasting impacts on tax and HR decisions. And more court cases over payroll nexus are almost certain to follow when states and cities with larger COVID-driven budget gaps begin making policy adjustments to increase payroll tax revenue collection.