Democratic Gov. Laura Kelly's Executive Order 20-01, signed Tuesday, gives employers the option to withhold income taxes based on the state of an employee's primary work location rather than where an employee worked remotely from March 13, 2020, through Dec. 31, 2020. After that, Kansas will revert to its typical statute that requires tax to be withheld on wages paid to Kansas residents or nonresident employees performing services in the state.
"This order helps ensure that tax season can go on without a hitch for Kansas businesses that have adjusted working schedules and employee work sites to keep people safe during the pandemic by allowing them to proceed with income tax withholdings as usual," Kelly said in a statement.
The order said the optional change is aimed at facilitating the payment and accounting of income tax withholding for businesses that "responsibly encouraged or required telework or a change in primary work location" amid the spread of COVID-19, the respiratory illness caused by the virus.
While some states have received pushback for claiming income taxes from employees who are teleworking elsewhere during the pandemic, the order appears aimed at waiving penalizing employees of out-of-state companies who didn't change their withholding location to Kansas, Jared Walczak, vice president of state projects at the conservative-leaning Tax Foundation, told Law360.
"This seems to be a hold harmless provision," Walczak said. "That's a taxpayer-friendly approach to address the confusion that has arisen during the pandemic, where many taxpayers simply aren't aware of their withholding liabilities."
Given the order's timing — being issued after 2020 ended — Kansas may forgive any withholding mistakes that occurred when teleworkers based in the state didn't inform their employers that they were working remotely from Kansas, Walczak said.
However, he added that the order may need some further clarification to explicitly spell out its intent.
Representatives for Kelly and the Kansas Department of Revenue did not immediately respond to questions.
Jason P. Lacey, a partner at Foulston Siefkin LLP, told Law360 that the order appears to also allow Kansas employers to withhold taxes from nonresidents who were teleworking in another state in 2020, but that the relief mainly relates to out-of-state companies that underwithheld their Kansas obligations. He said the order doesn't address the sourcing of the income but rather provides a pass if taxes were improperly withheld.
"Any excess beyond what employees actually owe in Kansas taxes will be refunded to them when they file their tax returns," Lacey said. "Whether a Kansas employer that overwithheld Kansas taxes has an issue with another state or the employee may be a different question that is really not addressed in the notice."
The order's provision that says employees who are teleworking inside Kansas will be subject to Kansas income tax withholding as of Jan. 1, 2021, could change the withholding tax obligations for some employees of out-of-state companies, at least temporarily, Walczak said. But he said it's reasonable for Kansas, or any state, to expect that an employee performing work inside the state will eventually become subject to its income tax withholding requirements.
However, he said that could create some potential double-taxation scenarios for employees who work remotely for a company located in a state with a so-called "convenience of the employer" rule, such as Nebraska. The convenience rule generally sources an employee's income to the employer's state unless an employee could not have performed the work at their employer's office.
"Saying that going forward you owe income taxes to Kansas if you work in Kansas would be the normal or appropriate treatment … but convenience rules can create double taxation," Walczak said.
Lacey said that because the withholding relief for failing to withhold the proper amount of Kansas tax was limited to 2020, the order effectively puts employers "on notice that they will need to take a closer look at their Kansas withholding obligations for 2021."
--Editing by Neil Cohen.
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