State Unemployment Insurance Taxability and Multi-Jurisdictional Income Withholding

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

The Issue State Unemployment vs. State Income Tax Withholding Reciprocal Agreements Local Taxes Multi-Jurisdictional Income Withholding Complications Telecommuters Audits

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

State Unemployment Insurance (UI) taxability is governed by a four-part test that all states adhere to: 1. incidental to those performed within the state? If so, employer is subject to state in which the services are localized. 2. the UI state. 3. control exercised? 4. not been met, the default is to the state of residence. Are services localized? Are services performed outside the state Where is the base of operations? If in a particular state, that is Is there a place of direction and control? Where is immediate What is the employee s state of residence? If all other tests have

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

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)

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

In general most states do not have a de 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 In general most states do not have a de minimis relating to the payment of wages for services. minimis threshold threshold 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

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

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.

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.

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.

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

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: duties for more than 30 days during the calendar year Employee s resident state; and State within which the employee is present and performing

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

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.

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