Presentation on theme: "Multistate Employment Cynthia Vance 415-593-0580 California Payroll Conference September 11 and 12, 2014."— Presentation transcript:
Multistate Employment Cynthia Vance California Payroll Conference September 11 and 12, 2014
Agenda The Issue State Unemployment vs. State Income Tax Withholding Reciprocal Agreements Local Taxes Multi-Jurisdictional Income Withholding Complications Telecommuters Audits
The Issue Who works in more than one taxing jurisdiction? Business travelers Telecommuters Corporate officers Board members Expatriates Foreign nationals Short-term assignees Permanent transfers
SUI Taxation vs. SIT Withholding State Unemployment Insurance (UI) taxability is governed by a four-part test that all states adhere to: 1. 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. 2. Where is the base of operations? If in a particular state, that is the UI state. 3. Is there a place of direction and control? Where is immediate control exercised? 4. What is the employee’s state of residence? If all other tests have not been met, the default is to the state of residence.
State Reciprocity Agreements States with Reciprocity Agreements: Illinois Iowa, Kentucky, Michigan, Wisconsin Indiana Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin Iowa Illinois Kentucky Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin Maryland Washington DC, Pennsylvania, Virginia, West Virginia Michigan Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin Minnesota Michigan, North Dakota Montana North Dakota New Jersey Pennsylvania North Dakota Minnesota, Montana Ohio Indiana, Kentucky, Michigan, Pennsylvania, West Virginia Pennsylvania Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia Virginia Washington DC, Kentucky, Maryland, Pennsylvania, West Virginia West Virginia Kentucky, Maryland, Ohio, Pennsylvania, Virginia Wisconsin Illinois, Indiana, Kentucky, Michigan
Local Tax Issues States with Local Taxes Alabama, Colorado, Delaware, Indiana, Kentucky, Michigan, Missouri, New Jersey, New York, Ohio, Oregon, Pennsylvania, West Virginia Mobile Workforce Examples Columbus, 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 rate Aurora Colorado Occupational Privilege Tax (OPT) – “Head tax” on both employers and employees on individuals who work within the city Grand Rapids, Michigan – Withhold from nonresidents for services rendered/performed when Grand Rapids is the predominant place of work
Multi-Jurisdictional Income EarnedPaid Base SalaryDailyBi-weekly or semi-monthly or monthly BonusOver bonus performance period or related to the goal of achievement Quarterly or annually or achievement of target CommissionRelated to a saleAfter sale close PensionDailyPost Retirement Stock OptionsFrom grant to vest/exerciseUpon exercise What happens when an employee works in more than one taxing jurisdiction during the earning period?
US Employees Mobile 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 workforce Limited system capabilities and overall lack of resources to track and calculate domestic mobility Withholding 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)
Multistate Withholding Employers should monitor closely Impacts employer’s employment tax filings and employee’s personal income tax liability Some states require an apportionment of stock compensation based on where vesting took place Compliance issues – if not managed properly, can lead to significant employer liability, tax, penalties, and interest FAS 5 – FIN 48 accrual/disclosure May lead to greater individual audit exposure for executives May affect state payroll apportionment factors City/Local tax withholding and reporting may apply
De Minimis Exceptions In 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 threshold e.g., New York does not require withholding unless an individual is present in the state for more than 14 days Nine states have an “income based” de minimis threshold e.g., Oregon does not require withholding unless an individual earns more than the Oregon Standard Deduction amount Georgia has both a “time based” as well as “income based” de minimis threshold
Exposure Areas Officers and highly paid employees traveling to nonresident states (including board meetings and meetings with investors) Companies utilizing stocks as a form of compensation States actively conducting employment tax audits Subsidiary entity operates in another state Unemployment paid to state but no income tax withholding Expense 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
Issues 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.Bloomberg BNA 2013 Survey of State Tax Departments 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.
Issues 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.
Issues 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.
Telecommuter Cases The 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.
State Withholding Audits Review of company expense reimbursement and travel policy Review of payroll manual for company policy on taxation of mobile workforce Review of payroll manual for company policy on taxation and reporting of stock and equity compensation Review of employee expense records–specifically hotel and flight reimbursements Review of any publicly available information as to major projects/events taking place in the state Review of executive calendars Review of corporate jet logs/itineraries Review of stock grant, vest, and exercise data relating to mobile workforce
Form W-4 Compliance States that require the use of specific state withholding certificates. AlabamaKentuckyNew Jersey ArizonaLouisianaNew York ArkansasMaineNorth Carolina ConnecticutMarylandOhio GeorgiaMassachusett (if claiming exempt) Virginia HawaiiMichiganD.C. IllinoisMississippiWest Virginia IndianaMissouriWisconsin Iowa
The Mobile Workforce State Income Tax Simplification Act of 2013-Senate Bill 1645 Previous version of this bill H.R and H.R did not pass States currently have varying and inconsistent requirements for: Employees to file personal income tax returns when working in a nonresident state; and Employers 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; and State within which the employee is present and performing duties for more than 30 days during the calendar year
Best Practices Identify/quantify the problem Make appropriate risk management decisions Develop short-term and long-term solutions Identification of mobile employee Capture the transaction Allocate the income Withhold and report-gross up or equalize? Develop appropriate policies Company’s responsibility for tax compliance Policy for double taxed income