Multistate Employees - California Payroll Conference

Report
California Payroll
Conference
Multistate Employment
Cynthia Vance
415-593-0580
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
New Jersey
•Pennsylvania
Indiana
• Kentucky,
Michigan,
Ohio,
Pennsylvania,
Wisconsin
Iowa
• Illinois
North Dakota
•Minnesota,
Montana
Kentucky
Maryland
• Illinois,
Indiana,
Michigan,
Ohio, Virginia,
West Virginia,
Wisconsin
• Washington
DC,
Pennsylvania,
Virginia, West
Virginia
Ohio
•Indiana,
Kentucky,
Michigan,
Pennsylvania,
West Virginia
Michigan
• Illinois,
Indiana,
Kentucky,
Minnesota,
Ohio,
Wisconsin
Pennsylvania
Virginia
•Indiana,
Maryland, New
Jersey, Ohio,
Virginia, West
Virginia
•Washington
DC, Kentucky,
Maryland,
Pennsylvania,
West Virginia
Minnesota
• Michigan,
North Dakota
West Virginia
•Kentucky,
Maryland,
Ohio,
Pennsylvania,
Virginia
Montana
• North Dakota
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
Earned
Paid
Base Salary
Daily
Bi-weekly or semi-monthly or
monthly
Bonus
Over bonus performance
period or related to the goal
of achievement
Quarterly or annually or
achievement of target
Commission
Related to a sale
After sale close
Pension
Daily
Post Retirement
Stock Options
From grant to vest/exercise
Upon 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.
 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.
Alabama
Kentucky
New Jersey
Arizona
Louisiana
New York
Arkansas
Maine
North Carolina
Connecticut
Maryland
Ohio
Georgia
Massachusett (if claiming
exempt)
Virginia
Hawaii
Michigan
D.C.
Illinois
Mississippi
West Virginia
Indiana
Missouri
Wisconsin
Iowa
The Mobile Workforce State Income Tax Simplification
Act of 2013-Senate Bill 1645
Previous version of this bill H.R. 2110 and H.R. 1864 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
Multistate Employment
Thank you for your attention
Cynthia Vance 415.593.0580

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