In today's workforce, it is common to have employees working on multiple projects across the country. It is surprising to many that working outside of their resident home state for as little as one day could create tax reporting, withholding and filing requirements. Unfortunately, states do not currently follow a consistent set of rules in determining when nonresidents become subject to tax and at which point company reporting and withholding obligations are triggered. This newsletter provides a summary of current and pending legislation, an overview of the risks for noncompliance, and a discussion on best practices to consider when evaluating US mobile workforce tax issues for your organization.
The Mobile Workforce State Income Tax Simplification Act of 2015
Business travelers are under increased scrutiny from state revenue agencies. This increased scrutiny, and an increasingly mobile workforce, has made it difficult for companies to evaluate and address the myriad of potential nonresident state reporting and withholding requirements for their employees. Congress is aware of this issue and legislation has been introduced to provide clarity and consistent standards for companies.
Members of Congress have introduced "The Mobile Workforce State Income Tax Simplification Act of 20XX" numerous times over the last nine years. The 2015 version, H.R. 2315, introduced by Reps Bishop (R-MI) and Johnson (D-GA) was the subject of a hearing June 2, 2015, in the House Judiciary Committee. The Committee approved the bill and sent it to the full House for consideration on June 17. It has attracted the support of more than 250 businesses and trade associations. The companion Senate bill, S. 386, was introduced on February 5, 2015 by Senator John Thune (R-SD) and Senator Sherrod Brown (D-OH), and referred to the Senate Finance Committee.
Like earlier versions, the bill would impose a 30-day threshold before states could begin taxing workers temporarily in the state. Once the employee exceeds this 30 day annual limit, employer reporting and withholding would be required, as appropriate, for all workdays spent in the given state.
Until this bill is signed into law, it will be necessary to review the tax laws of each individual state your employees work in to ensure the company is in compliance with any nonresident reporting and withholding requirements. Unfortunately, states are not always consistent in their definition of residency or in the income thresholds that dictate company reporting and withholding rules. Indeed, some states will technically require tax withholding and reporting from an employee's first workday in the state. Other states do not impose any income tax, such that there will be no company reporting and withholding considerations.
Risks for Noncompliance
What is the risk for the company?
As most states are trying to increase revenue dollars, they are ramping up their enforcement for tracking mobile employees to ensure state tax laws are being followed. Technology has made it easier for state tax auditors to focus on companies that may have a mobile workforce, with special focus on executives and board members. If auditors note out-of-state offices or nonresident board members, questions can be raised and a payroll audit initiated to ensure the proper income and tax withholding has been reported for their state.
Failure to comply with the appropriate payroll reporting and withholding can result in tax assessments to the employee or company, with related penalties and interest. These costs are often unexpected, leading to employee and potentially business unit dissatisfaction. In addition, the resulting "headlines" can be damaging to the reputation of your employees and organization.
Best Practice Considerations
What are some best practices to consider in monitoring your company's mobile workforce and in addressing the various state tax reporting and withholding requirements?
Track and Proactively Manage Workdays
Tracking the location where your employees are working is a critical first step in determining the Company reporting and withholding requirements.
It is important to institute a system that requires employees to either provide this detail directly or indirectly through required use of a company or third-party resource, such as a travel agency.
GTN has an online travel and workday calendar that is easy to use and can be distributed to employees to track their workdays in various states. Once the individual records their work location, reports can be generated to determine when reporting and withholding should be implemented for a particular employee. In addition, a mobility manager can have access to the workday detail for all of the employees so that monitoring can occur on a real time basis.
Understand the Rules
As has been noted, non-resident state reporting and withholding rules can be complex and may differ by jurisdiction. These requirements can also vary depending on such factors as your company's corporate structure, the activities performed by the individual in the work location, the relationship the company has with the individual (i.e., independent contractor vs. employee) and the individual's personal tax residency. It is important that your organization understand the technical requirements for each jurisdiction and implement processes and procedures to appropriately monitor and evaluate reporting and withholding requirements for your mobile employees.
Educate Business Travelers and Management
Educating your business travelers and their managers of the potential risks and the need to report and monitor travel will assist in compliance. If the individuals who authorize and send employees to work outside of their home state are aware of the potential tax and reporting obligations, there is a higher potential for employees to track the travel and workday information from the start. In addition, proactive planning may be available if business units or project leads understand taxation thresholds for given states.
Develop a Company Mobility Policy
Developing a company policy that provides clear guidance to management and employees is essential to risk management. The policy should outline the expectations on tracking travel and workdays and define the process to review and initiate any required reporting and withholding obligations.
Consider Company Support for the Employee
Once a state income tax liability and withholding has been triggered, the employee will have an obligation to file an annual state income tax return for that particular state. If income is being reported to both the resident and nonresident state(s), the employee will need to consider ways to address potential double taxation, such as through use of available tax credits on their resident state income tax return. It is important to note, that although credits may be available, an employee's overall tax liability may increase depending on the amount of tax imposed by those state jurisdictions.
For example, Texas has no individual income tax. Thus, any employees subject to tax in another state will experience an overall increase in their income liability. If the income is related to their employment, the Company should consider how to address this increased cost for the employee.
To address the potential increase in tax, some companies take the position that they will fully support the employees through tax gross-ups to ensure they are not incurring additional taxes due to the work performed in the nonresident state(s). This policy not only addresses the possible increase in tax for the employee, but also supports compliance as the employee is more likely to properly report the location of their work if they know they will be kept whole. In addition to the tax gross-ups, companies may also provide the employees with annual tax return preparation to address potential complexities in filing multiple state income tax returns.
As long as employees continue to work outside their home states, it is crucial for companies to monitor US federal and state legislation and to ensure that they are compliant with all reporting and tax withholding obligations. A system to proactively track employee workdays and a process to report the required state income and tax withholdings in payroll needs to be implemented. In addition, the company should develop a policy and determine what level of assistance, if any, will be provided to the employee.
If you have any questions please contact Mark Tirpak at email@example.com or +1 (713) 244-5020.
The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.
Author: Mark Tirpak
Mark is Managing Director for GTN's South region. He has over 20 years of professional experience in advising multinational companies on global mobility related issues, including expatriate taxation, payroll, equity compensation planning, international assignment policy review, and program administration. Having been an expat himself enhanced his desire to assist and help simplify the process for assignees who are overseas. +1.713.244.5020 | firstname.lastname@example.org