Stephanie Pfister, Ryan LLC October 8, 2015 – 9:00 a.m. – 10:30 a.m.

Multi-State Employees

Stephanie Pfister, Ryan LLCOctober 8, 2015 – 9:00 a.m. – 10:30 a.m.

Speaker Introduction

The Issue State Unemployment vs. State Income Tax

Withholding Reciprocal Agreements Local Taxes Multi-Jurisdictional Income Withholding Complications Telecommuters Audits

Agenda

Employees working in more than one tax jurisdiction, such as:

◦ Business travelers ◦ Telecommuters ◦ Corporate officers◦ Board members◦ Expatriates◦ Foreign nationals◦ Short-term assignees◦ Permanent transfers

The Issue

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.

SUI Taxation vs. SIT Withholding

Reciprocal 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

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

Local Taxes

Multi-Jurisdictional Income

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)

U.S Tax Issues

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

Multi-State Withholding

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

De minimis Exceptions

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

Exposure Areas

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.

Telecommuters

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.

Telecommuters (con’t)

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.

Telecommuter Cases

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

State Withholding Audits

The Mobile Workforce State Income Tax Simplification Act - House Bill H.R. 2315 and it’s companion Senate bill S.386 are pending

Several previous versions have not passed 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; andState within which the employee is present and performing duties for more than 30 days during the calendar year

Pending Legislation

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

Best Practices

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.

Telecommuters

Thank you and please remember to complete your evaluation for this session.