Eclipse Mobile Workforce Income Taxation · 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 State

Mobile Workforce Income Taxation: Is your Company Compliant?

Heather Raper, Vice President, HCM Operations

Agenda

2

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.

4

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

5

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

6

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.

7

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

8

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

9

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

10



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

11



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

12


13

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


14

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


15

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.


18

19

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


20

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

21

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

22

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


23


24

US Audit Focus Continues to Increase

High

Med-High

Medium

CT


25

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.


26

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


27

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

www.plansource.comConfidential and Proprietary

Q&A

Documents

Eclipse Mobile Workforce Income Taxation · 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 State