Presentation on theme: "California Payroll Conference"— Presentation transcript:
1California Payroll Conference September 11 and 12, 2014Multistate EmploymentCynthia Vance
2Agenda The Issue State Unemployment vs. State Income Tax Withholding Reciprocal AgreementsLocal TaxesMulti-Jurisdictional IncomeWithholding ComplicationsTelecommutersAudits
3The Issue Who works in more than one taxing jurisdiction? Business travelersTelecommutersCorporate officersBoard membersExpatriatesForeign nationalsShort-term assigneesPermanent transfers
4SUI Taxation vs. SIT Withholding State Unemployment Insurance (UI) taxability is governed by a four-part test that all states adhere to:Are services localized? Are services performed outside the state incidental to those performed within the state? If so, employer is subject to state in which the services are localized.Where is the base of operations? If in a particular state, that is the UI state.Is there a place of direction and control? Where is immediate control exercised?What is the employee’s state of residence? If all other tests have not been met, the default is to the state of residence.
5State Reciprocity Agreements States with Reciprocity Agreements:IllinoisIowa, Kentucky, Michigan, WisconsinIndianaKentucky, Michigan, Ohio, Pennsylvania, WisconsinIowaKentuckyIllinois, Indiana, Michigan, Ohio, Virginia, West Virginia, WisconsinMarylandWashington DC, Pennsylvania, Virginia, West VirginiaMichiganIllinois, Indiana, Kentucky, Minnesota, Ohio, WisconsinMinnesotaMichigan, North DakotaMontanaNorth DakotaNew JerseyPennsylvaniaNorth DakotaMinnesota, MontanaOhioIndiana, Kentucky, Michigan, Pennsylvania, West VirginiaIndiana, Maryland, New Jersey, Ohio, Virginia, West VirginiaVirginiaWashington DC, Kentucky, Maryland, Pennsylvania, West VirginiaWest VirginiaKentucky, Maryland, Ohio, Pennsylvania, VirginiaWisconsinIllinois, Indiana, Kentucky, Michigan
6Local Tax Issues States with Local Taxes Mobile Workforce Examples Alabama, Colorado, Delaware, Indiana, Kentucky, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, West VirginiaMobile Workforce ExamplesColumbus, Ohio – Nonresidents working in the city are taxed at 2.5%New York Metropolitan Commuter Transportation Mobility Tax (MCTMT) –Based upon four-part test (akin to SUTA )Earned Income Tax (EIT) Pennsylvania – Required to withhold at the nonresident rateAurora Colorado Occupational Privilege Tax (OPT) – “Head tax” on both employers and employees on individuals who work within the cityGrand Rapids, Michigan – Withhold from nonresidents for services rendered/performed when Grand Rapids is the predominant place of work
7Multi-Jurisdictional Income EarnedPaidBase SalaryDailyBi-weekly or semi-monthly or monthlyBonusOver bonus performance period or related to the goal of achievementQuarterly or annually or achievement of targetCommissionRelated to a saleAfter sale closePensionPost RetirementStock OptionsFrom grant to vest/exerciseUpon exerciseWhat happens when an employee works in more than one taxing jurisdiction during the earning period?
8US EmployeesMobile employees traveling outside their primary work location may trigger income tax withholding requirements in multiple states.Issues to consider:Income taxes currently not withheld in nonresident work state for traveling/mobile workforceLimited system capabilities and overall lack of resources to track and calculate domestic mobilityWithholding tax calculation is complicated for deferred and equity-based compensation (e.g., bonus paid in current year for prior year performance, deferred compensation and stock vesting/exercise)
9Multistate Withholding Employers should monitor closelyImpacts employer’s employment tax filings and employee’s personal income tax liabilitySome states require an apportionment of stock compensation based on where vesting took placeCompliance issues – if not managed properly, can lead to significant employer liability, tax, penalties, and interestFAS 5 – FIN 48 accrual/disclosureMay lead to greater individual audit exposure for executivesMay affect state payroll apportionment factorsCity/Local tax withholding and reporting may apply
10De Minimis ExceptionsIn general most states do not have a de minimis threshold relating to the payment of wages for services.However:Seven states have a “time based” de minimis thresholde.g., New York does not require withholding unless an individual is present in the state for more than 14 daysNine states have an “income based” de minimis thresholde.g., Oregon does not require withholding unless an individual earns more than the Oregon Standard Deduction amountGeorgia has both a “time based” as well as “income based” de minimis threshold
11Exposure AreasOfficers and highly paid employees traveling to nonresident states (including board meetings and meetings with investors)Companies utilizing stocks as a form of compensationStates actively conducting employment tax auditsSubsidiary entity operates in another stateUnemployment paid to state but no income tax withholdingExpense reports show frequent travel to nonresident state(s)Corporate jet log shows travel to nonresident state(s)Global operations – necessitating foreign employees providing services in various states
12Issues with Telecommuters The Bloomberg BNA 2013 Survey of State Tax Departments revealed that 36 states, plus the District of Columbia and New York City, take the position that income tax nexus would result for an out-of-state corporation with employees that telecommute from homes within their jurisdiction.As in prior years, most of these states said that their position would remain the same even if the corporation had made no sales in the state or the employees telecommuted for only part of their total work time.
13Issues with Telecommuters cont’d 33 states said that nexus would arise from a single telecommuter who performed back office administrative business functions, such as payroll, as opposed to direct customer service or other activities directly related to the employer’s commercial business activities.34 states said that nexus would be triggered by a single telecommuting employee who performs product development functions, such as computer coding.
14Issues with Telecommuters-Case Telebright Software, a Maryland based company, in 2004, allowed an employee to relocate to New Jersey and telecommute by writing software code from home.Telebright withheld New Jersey income taxes from the employee’s wages, rather than withholding Maryland income taxes like they do for the rest of their employees.With only one employee in the state of New Jersey, Telebright is obligated by the New Jersey Division of Taxation to file a New Jersey corporation business tax return.For Telebright, this obligation seemed outrageous because it did not maintain an office or financial accounts in New Jersey, nor did it solicit sales in the state; besides the single employee, Telebright has no significant ties to New Jersey.
15Telecommuter CasesThe California State Board of Equalization held in 2012 that a recruiter working from her home in California for a Massachusetts business created Nexus for California franchise tax purposes (even though she was classified as an independent contractor).The New York Department of Taxation and Finance is imposing automatic income tax withholding audit assessments on employers that made wage reporting adjustments as the result of an IRS employment tax audit. The Department asserts that these income tax withholding audit assessments are not subject to the normal three-year statute of limitations.
16State Withholding Audits Review of company expense reimbursement and travel policyReview of payroll manual for company policy on taxation of mobile workforceReview of payroll manual for company policy on taxation and reporting of stock and equity compensationReview of employee expense records–specifically hotel and flight reimbursementsReview of any publicly available information as to major projects/events taking place in the stateReview of executive calendarsReview of corporate jet logs/itinerariesReview of stock grant, vest, and exercise data relating to mobile workforce
17Form W-4 ComplianceStates that require the use of specific state withholding certificates.AlabamaKentuckyNew JerseyArizonaLouisianaNew YorkArkansasMaineNorth CarolinaConnecticutMarylandOhioGeorgiaMassachusett (if claiming exempt)VirginiaHawaiiMichiganD.C.IllinoisMississippiWest VirginiaIndianaMissouriWisconsinIowa
18The Mobile Workforce State Income Tax Simplification Act of 2013-Senate Bill 1645 Previous version of this bill H.R and H.R did not passStates currently have varying and inconsistent requirements for:Employees to file personal income tax returns when working in a nonresident state; andEmployers to withhold income tax on employees who travel outside their residence state (or primary work state)This bill provides that wages and other remuneration earned by an employee who works in more than one state in a year are subject to income tax in the:Employee’s resident state; andState within which the employee is present and performing duties for more than 30 days during the calendar year
19Best Practices Identify/quantify the problem Make appropriate risk management decisionsDevelop short-term and long-term solutionsIdentification of mobile employeeCapture the transactionAllocate the incomeWithhold and report-gross up or equalize?Develop appropriate policiesCompany’s responsibility for tax compliancePolicy for double taxed income