The Convenience Of Employer (COE) rule is an exception to the general golden rule for establishing what work location to use for remote employees.
If you have questions about what work address to use for an employee in Gusto, work with a tax advisor or accountant—Gusto cannot advise.
Taxation is tricky, always consult a tax advisor
When an employee lives in a different state than where an employer is located, determining where income tax is owed can sometimes be complicated.
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The golden rule states: Employees will generally need to pay taxes, and file an income tax return, in both states.
- Employees can try to avoid double taxation by requesting a state income tax credit on their personal tax return.
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Reciprocal agreements state: The employer withholds income tax only in the employee’s state of residence.
- A reciprocal agreement eliminates the employee’s need to file for a credit, for taxes paid to another state (because they only have to have tax withheld in one).
- Heads up: Many states do not provide individual income tax reciprocity.
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The COE rule states: If an employer requires an employee to work in another state, for the employer’s convenience, once the COE “test” is passed, an employee’s work address should be the office where the direction of control is coming from (and not their home address).
- This is convenient for the employer because they do not have to register and pay unemployment tax (or other taxes) in the employee’s resident state.
- If, however, the employee chooses to work in another location (for the employee’s convenience), taxes are typically owed in both states (per the golden rule).
Passing the COE “test”
Meeting the criteria for when a remote employee working in another state is the “employer’s convenience” varies by state—it’s important to familiarize yourself with state-specific criteria found in the resources below.
Employers in states where the COE rule may apply should work with their tax advisors and accounting partners to:
- Discuss the implications of the COE rule and;
- Apply with the state to enact the COE rule, if applicable;
- Determine what office (work address) remote employees should be assigned to.
States where COE may apply—additional resources included
Reminder: If you have questions about what work address to use for an employee in Gusto, work with your tax advisors or accountants—Gusto cannot advise.