Workers Crossing State Lines Mean More Employer Audits: Taxes
By Michael Baer – Nov 4, 2013 12:00 AM ET
Workers who perform their tasks in different states may expose their employers to additional tax liabilities as states seek to collect levies from nonresidents by increasing enforcement actions.
Payroll systems that aren’t configured to track employee earnings for multiple work locations can expose employers to tax audits from numerous states, said Mary Hevener, a partner at Morgan, Lewis & Bockius LLP in Washington.
Employers that fail to collect and pay taxes to appropriate jurisdictions for traveling workers generally are liable for the taxes, Hevener said at a conference on payrolls in Newport News, Virginia last month, Bloomberg BNA reported. States audit employers because it is easier and more efficient than scrutinizing employees, especially those who haven’t been in a state for long.
The exposure occurs because “a lot of businesses don’t try to track the travelers,” she said.
Employers with mechanisms that track multistate work sometimes can receive complaints after mobile employees see wages and taxes for more than one state reported on their W-2 forms, Hevener said. Employers that report wages and taxes to more than one state essentially obligate the employee to file individual returns in those states. Hevener said she files tax returns in nine states.
Nineteen states with income taxes have certain thresholds of time spent and money earned while working in their state, according to a map that Hevener displayed. Twenty-two states technically subject workers to tax on the first day of travel in the state.
Of those states with thresholds, New York generally doesn’t apply state tax for certain work activities performed inside its borders for 14 days or fewer in a year, Hevener said. Georgia allows out-of-state workers to work in the state up to 23 days in a quarter without applying state taxes, or up to 5 percent of total compensation derived from in-state work. Other states have poorly explained rules on income allocations, she said.
To add to the issue’s complexity, states can tax stock options and restricted stock after employees move elsewhere, Hevener said. The taxing states also have tracking mechanisms for stock option income and stock appreciation rights, though there are no set rules among states for how these amounts are to be taxed.
Four general methods are used to identify when stock compensation is earned for tax purposes: grant to vest, grant to exercise, year of exercise and degree of appreciation. Some states, Hevener said, haven’t adopted any option-sourcing rules.
Federal law bans states from taxing certain types of deferred compensation earned in one state for those now living in other states.
Several attempts have been made to standardize how multistate workers are treated for state tax purposes, said Patrick Rehfield, a lawyer at Morgan Lewis who spoke with Hevener at the conference.
Under the Mobile Workforce State Income Tax Simplification Act, proposed in the past several congressional sessions, nonresidents would have to work at least 30 days in a state before becoming subject to out-of-state taxes, Rehfield said. The legislation, which would exclude professional athletes, professional entertainers and some public figures from the time frame, has encountered strong state opposition, he said.
Another proposal, the Multistate Tax Commission’s mobile workforce withholding and individual income tax model statute, would establish a 20-day threshold, Rehfield said.
Some states with income thresholds instead of day-counting thresholds are critical of the model statute. Under it, high-earner nonresidents working fewer than 20 days would be exempt from filing returns, while lower-paid nonresidents working more than 20 days in a state would have to file, Rehfield said.
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