Post on 30-Jul-2020
Mobile Workforce Income Taxation: Is your Company Compliant?
Heather Raper, Vice President, HCM Operations
Agenda
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Current Landscape of Mobile Workforce
Sourcing Wages To Correct State
Multi-State Income Tax Withholding
Steps to Reduce Audit Exposure
Current Landscape
3
Current Landscape
Remote employment is becoming more and more common as businesses come to terms with trusting workers to work while out of sight of supervisors and colleagues.
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Trends in Remote Employment
4.48.4
34
60
0
10
20
30
40
50
60
2003 2004 2006 2016
Number of Remote US Based Employees in Millions
Current Landscape
Businesses are realizing the value of lower office overhead, ability to hire qualified workers in different parts of the country, increased productivity on bad weather days, and increased employee engagement
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Trends in Remote Employment
4.48.4
34
60
0
10
20
30
40
50
60
2003 2004 2006 2016
Number of Remote US Based Employees in Millions
Current Landscape
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Additional Considerations
Employers must provide necessary work applications, such as secure access to the corporate network.
Employers must understand their responsibilities for income tax, unemployment, minimum wage, workers compensation, overtime calculations, when to pay wages, PTO policies in other states and more.
Audits are on the rise due to increased technologies between the states and FEIN matching amongst state agencies.
Mobile workers who frequently travel to work across state lines also create additional complexity when it comes to tracking state requirements of income taxation and the tracking of wages by state.
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Keeping track of the requirements imposed by states on employers when it comes to withholding income taxes in nonresident states is
incredibly complex due to the different requirements between states.
Keeping track of the requirements imposed by states on employers when it comes to withholding income taxes in nonresident states is incredibly complex due to the different requirements between
states.
http://www.mobileworkforcecoalition.org/problem
New York is the most onerous. Requirements for employers & employees don’t match.
VT NJ DE RI
CT NH MA MD
On the first day of travel within the state
After reaching specific threshold (see notes on mobileworkforcecoalition.org)
No general state income tax
Current Landscape
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Recent Developments
Jurisdiction Act/Law Details
Pennsylvania Act 32In 2012 the state streamlined Earned Income Tax collections and reporting at the
local level. Administrative guidelines eases compliance for short-term business travelers
Maryland MD vs WynneIn 2015, the US Supreme Court held that Maryland’s law disallowing a tax credit
against local income taxes for tax paid in other states is unconstitutional. The ruling will likely influence all local tax laws with similar restrictions
Ohio Sub. H.B. 5Effective in 2016, de minimis threshold for nonresident local income tax withholding
is increased from 12 to 20 days BUT the provision only applies to employers that have offices or operations within Ohio.
Indiana Public Law 243 Effective in 2017, consolidates the three local income tax rates (COIT, CAGIT, CEDIT) into one, but increases tax that nonresidents pay.
Source: Ernst and Young US Mobile Workforce Income Tax Considerations Webcast
Current Landscape
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Mobile Workforce State Income Tax Simplification Act
http://www.mobileworkforcecoalition.org/faqs/
What problem does this legislation address?
States currently have varying and inconsistent standards regarding the requirements: for
employees to file personal income tax returns when traveling to a nonresident state for
temporary work periods; and, for employers to withhold income tax on employees who
travel outside of their state of residence for temporary work periods.
Current Landscape
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Mobile Workforce State Income Tax Simplification Act
http://www.mobileworkforcecoalition.org/faqs/
How does this legislation solve the problem?
It provides for a uniform, fair, and easily administered law and helps to ensure that
the correct amount of tax is withheld and paid to the states without the undue
burden that the current system places on employees and employers.
The Act provides a uniform 30-day threshold before liability attaches and
withholding is required. After 30 days, existing state laws will apply.
Current Landscape
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Mobile Workforce State Income Tax Simplification Act
http://www.mobileworkforcecoalition.org/faqs/
What is the latest status?
• First introduced in 2009
• Passed House in 2012, but not the Senate
• Currently opposed by the Federation of Tax Administrators and the National Governors Association
• Also opposed by states that benefit the most from nonresident income tax revenues
• Currently supported by the American Institute of Certified Public Accountants and the APA
Sourcing Wages to the Correct State
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Sourcing Wages to the Correct State
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State Unemployment Insurance
The SUI state is where the employee performs some work and (in this order):
• Where the work is localized• The employee’s base of operations or• The employee’s place of control
• If none of the above, the employee’s residence
An employer has a headquarters in New York
An employee works in Louisiana and Texas.His home office is Texas and his manager is in New Mexico.
What state does the employer pay SUI to?
Where the work is localized (N/A)The employee’s based of operations (Texas)
The employee’s place of control (New Mexico)If none of the above: The employee’s residence
Since work is not localized in one state and Texas (rather than New York) is the base where the employee normally receives
instruction, mail, etc., Texas is the SUI state.
Source: US Department of Labor, Program Letter 20-‐04
Sourcing Wages to the Correct State
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Understanding Nexus for Resident Income Tax Withholding
Resident income tax withholding is required in a state if:
• Employee works from home office PLUS– Such employment constitutes nexus (or a business
connection to the state) under the state or local law
– Employer owns or leases property in the state
If neither of these applies, then resident withholding may not be required
An employer has offices in VA and DC.
An employee works from home in MD, but reports for meetings to the DC location 4 days a year.
What state withholding must the employer withhold?
State income tax withholding is required in MD since the employee works from a home office where the state recognizes
this as Nexus (business connection).
Even though the employer does not have offices in MD, they must register to withhold state income tax for MD since the work is being performed in MD by the employee in their home office.
Note: DC does not require tax withholding from non-residents who file non-resident withholding forms.Source: US Department of Labor, Program Letter 20-‐04
Sourcing Wages to the Correct State
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State Reciprocal Agreements
Some states have entered into reciprocal agreements (usually states that border one another) and nonresident state income tax is not required, despite the existence of nexus. Employees must file an
exemption from non-withholding for the work-in state with their employer.
NOTE: If the employer does not have nexus in the resident state, and the employee does not perform work there, the employer is not required to register and withhold in that state.
DCD-4A
ILW-5-NR
INWH-47
IA44-016
KY42A80
9
MDMW50
7
MIMI-W4
MNMWR
MTNR-2
NJNJ-165
NDNDW-
R
OHIT-4NR
PAREV-420
VAVA-4
WVIT-
104R
WIW-220
ALL IA KY IL IL DC IL MI ND PA MI IN IN DC KY IL
KY MI IN PA IN ND MN KY MD KY MD IN
MI OH MI VA KY MI NJ MD OH KY
WI PA OH WV MN PA OH PA PA MI
WI VA OH WV VA WV VA
WV WI WV
WI
Since New York, Connecticut and New Jersey do not have a reciprocal agreement, it may result in “double taxation.”
This means, for example, if you work in New York and live in New Jersey, you would have to pay New York income taxes as a
nonresident and also pay New Jersey income taxes as a residentsince you live in New Jersey.
Sourcing Wages to the Correct StateState Reciprocal Agreements
Residents of NJ and most other states can take a credit for taxes paid to other jurisdictions
The US Supreme Court declined to hear a challenge concerning the
constitutionality of this law (Zelinsky vs Tax Appeals Tribunal)
In many states and localities, lump sum payments such as accrued time off, severance, equity compensation and non-qualified deferred compensation must be sourced to the jurisdiction(s) where the compensation was earned
for income tax withholding purposes.
There are some exceptions to these laws for Supplemental Executive Retirement Plans (SERP), pension plans, Interstate income for solicitation or
orders to be shipped across state lines, and Interstate Transportation income for motor carriers, Rail Carriers, Water Carriers, Air Carriers
Source: P.L. 104-95, P.L. 86-272, 49 USC 14503(a), 49 USC 11502, 49 USC 14503(b)(2), 49 USC 40116(f)(2)
Sourcing Wages to the Correct StateTrailing Compensation
In 2015 a bonus is earned (not yet paid) in New York. In 2016, employee is relocated to Nevada
and is paid the bonus.
The bonus is subject to New York withholding when paid in Nevada.
Multi-State Income Tax Withholding
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Multi-State Income Tax WithholdingTo Tax or Not To Tax
Based on the rules in these states, if an employee travels for work and meets the thresholds below, then the employer should be recording wages by the state in which they were earned when they process payroll.
• Arizona | is in the state for more than 60 days in a calendar year.• California | earns in-state wages above the state's "Low Income Exemption Table."• Connecticut | is in the state for more than 14 days in a calendar year.• Georgia | is in the state for more than 23 days in a calendar year or if $5,000 or more or 5% or more of total income is attributable to Georgia.• Hawaii | is in the state for more than 60 days in a calendar year.• Idaho | earns in-state wages of $1,000 or more in a calendar year.• Maine | is in the state for more than 10 days in a calendar year.• Minnesota | earns a specified amount in a calendar year (currently $10,300).• New Jersey | earns in-state wages that equals or exceeds the employee's personal exemption in a calendar year.• New Mexico | is in the state for more than 15 days in a calendar year.• New York | is in the state for more than 14 days in a calendar year.• North Dakota | is in the state for more than 20 days in a calendar year and is a resident of a state that provides similar protections
(such as reciprocal agreements; certain occupations not protected).• Ohio | is in the state for more than 20 days in a calendar year.• Oklahoma | earns in-state wages of $300 or more in a calendar quarter.• Oregon | earns in-state wages equal to or exceeding the employee's standard deduction.• South Carolina | earns in-state wages of $800 or more in a calendar year.• Utah | employer (not employee) does business in the state for more than 60 days in a calendar year.• Virginia | earns in-state wages equal to or exceeding the employee's personal exemptions and standard deduction or filing threshold
(if elected by the employee).• West Virginia | earns in-state wages equal to or exceeding the employee's personal exemptions.• Wisconsin | earns in-state wages of $1,500 or more in a calendar year.
Day 1 states: Alabama, Arkansas, Colorado, Delaware, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi, Missouri, Montana, Nebraska, North Carolina, Pennsylvania, Rhode Island, Vermont
Your employer should have a means to track wages during travel
An employee who travels to New York,
Arkansas and Colorado in the same
week, could pay income tax in all
three states
Multi-State Income Tax Withholding
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To Tax or Not To Tax – Variables to Consider
Covered Employer?
• Certain industries are exempt from the nonresident income tax requirements
• Government and non-profit employers are exempt from FUTA and have two options on how they pay state unemployment insurance
Covered Employment/Employee?
• Type of employment (Agricultural for example)
• Worker Classification (Employee vs Independent Contractor)
Covered Wages?
• Each jurisdiction maintains its own rule for what is considered taxable wages
• Some wages are excluded such as health and welfare benefits (but not in all states), retirement contributions, fringe benefits, substantiated business expenses
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When is a separate form W-4 required?
All blue states on the map require a W-4
Many states will allow you to use the Federal Form W-4.
Those with stars will not allow you to use the Federal Form W-4
States in grey have no state income tax
CTDEDC
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What states have local income tax?
States with white stars have some form of local income tax
Many states have address based tax finders
Many payroll companies offer geocode software to validate addresses for local taxation
NJMDDEDC
Steps to Reduce Audit Exposure
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Steps to Reduce Audit Exposure
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US Audit Focus Continues to Increase
High
Med-High
Medium
CT
Steps to Reduce Audit Exposure
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Gather, Archive and Regularly Review
Records needed in payroll tax audit defense:
• Federal, state and local employee tax certificates* (W-4 forms or equivalent)
• Wages/Deductions by pay period and type (retro, commissions, bonus, etc. sufficient to support the withholding tax calculation used)
• Work and resident location data by pay period* (time sheets, GPS tracking data, etc.)
• Support for wage apportionment calculations (wages by state per pay period by day, hours worked, percent of salary, etc.)
• Proof of timely tax payments and filings
• Copies of returns – federal, State, Local; be sure to keep copies provided by your third party processor on file
• Copies of Forms W-2*May also require all applicable employee data as required by record keeping regulations for current and historical periods.
Steps to Reduce Audit Exposure
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Risk Assessment and Mitigation
A four-step approach to reduce audit exposure Mitigate
Amnesty programVoluntary Disclosure
IdentifyWork and Resident
Locations
PrioritizeMonetary RiskReputational
Risk
ResearchRequirements
Sanctions
Comply
Steps to Reduce Audit Exposure
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The Risk of Non-Compliance
Measure the risk, not the chances of getting caught!
Withholding Tax Liability
Penalties, interest and
criminal charges
Officer personal liability
Employee audits,
assessments and
employee morale
Loss of business license
Loss of Reputation
Public companies must report any known contingent liability on their financial statements (FAS 5)
Increasing Consequences
The American Payroll Association offers an 8-hour course on Multi-State compliance
Contact your payroll vendor to understand the tools available for compliance
Mobile Workforce Coalition www.mobileworkforcecoalition.org
Contact your congressman: http://www.mobileworkforcecoalition.org/contact-congress/#/6
Get Educated, Encourage Compliance, Affect Change
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