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After floods, hurricanes, earthquakes and other natural disasters, employers performing recovery work after disasters or those directly affected by disasters should ensure that they are in compliance with multi-state withholding regulations.
The demand for resources following natural disasters may exceed local supply, so companies often need to bring in resources temporarily from out of state, such as materials, equipment and disaster workers. Disaster-recovery work includes but is not limited to repairs, renovation, building or activities related to infrastructure damaged by the disaster.
Because disaster-recovery employees often are nonresidents, tracking employees' movement, which can trigger nexus for the company in that state, can be challenging for employers. Nexus, or a business connection for the employer, can occur when the employer has a business location, sales transactions or employees performing services in another state. For state tax purposes, nexus generally means a certain threshold of contact exists between an employer and a state before the state has jurisdiction to tax the employer.
To ease the burdens on disaster-recovery companies, eleven states have passed laws that allow out-of-state employers to avoid establishing nexus through recovery activities in the state where the disaster occurred.
Thus, these laws allow out-of-state businesses that perform disaster-related work within a state to not establish a level of presence that would require them to register, file or remit state or local taxes or have employees subject to state licensing or registration requirements.
The workers also are not considered to have established residency or presence in the state that would require their employer to file and pay income taxes or be subject to tax withholding or file and pay any other state or local tax resulting from their work during a disaster period.
Often this disaster period starts when the governor or the president declares an area to be a disaster and ends a certain number of days after that determination. In order to take advantage of the exemption, states often will require businesses to submit a form that specifies that they are only within the state for disaster-related work. The form exempts a business from having to register as an employer and from being subject to state tax liability.
Disaster-recovery workers can trigger nexus for employers.
This year, six states have carved out income tax withholding exemptions for nonresident employees doing disaster-recovery work in state as well as for their employers, and Illinois has pending legislation (H.B. 5595), which was referred to the Rules Committee on March 28.
Alabama passed legislation exempting disaster-recovery workers from income tax withholding effective March 12, and Utah passed legislation effective May 13. Georgia passed similar legislation effective July 1, and Missouri's legislation was effective Aug. 28.
Effective Dec. 31, employers cannot withhold Arizona income tax from nonresident employees who are in the state performing disaster-recovery work. Arizona also allows all employees who are in the state for less than 60 days in a year to be exempt from withholding.
In addition, disaster-recovery workers in Colorado are exempt from state income tax withholding, effective Jan. 1, 2015.
Maine was one of the first states to pass such legislation, which was effective April 12, 2012. South Carolina followed, passing a temporary exemption for out-of-state disaster-recovery workers that was effective June 19, 2013, and later passing legislation to make the exemption permanent effective June 2, 2014.
Maryland passed similar legislation effective June 1, 2013. Indiana's bill was effective July 1, 2013, and Delaware's disaster-recovery exemption went into effect July 16, 2013.
Employers affected by disasters have income tax withholding considerations as well, often in the form of filing and payment extensions.
The Internal Revenue Service and individual states often will extend income tax withholding filing and payment deadlines, usually after an area has been declared a disaster by the governor or the president. Applying for these extensions can be as easy as writing the disaster at the top of forms, but states can require more complex application processes.
For example, California employers in El Dorado and Siskiyou counties affected by wildfires may request a 60-day extension for filing income tax withholding forms and depositing funds, the California Employment Development Department said. Employers must submit the request within 60 days of the due dates of the forms and deposits, the department said. The department also made the 60-day extension available to employers in Napa, Solano and Sonoma counties affected by the Aug. 26 earthquake.
Employers also can offer tax-free reimbursements to employees affected by a qualified disaster under Internal Revenue Code Section 139. Qualified-disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that are not covered by insurance. Expenses to repair or rehabilitate personal residences or repair or replace the contents that are not covered by insurance also are included.
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