todd lard charlie kearns tei nebraska february 17, … · example: new jersey ... new york...

State Tax Developments with Mobile Employees and Multistate Contractors

Todd Lard Charlie Kearns TEI Nebraska February 17, 2015

©2015 Sutherland Asbill & Brennan LLP

Agenda

• Introduction • Mobile Workforce & State Employment Taxes

Overview of State Withholding Employer Compliance, Audits, and Solutions Special Problems Unemployment Insurance

• Non-wage Payments and 1099 Compliance

• Questions?

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INTRODUCTION


Issues Faced By Companies

• Employer with salaried sales force Employee visits customers in 7 different states Receives bonus based on sales in following year

• Employer has CEO, CFO, and others visit investment banks in New York one week each quarter and may have one or two day visits at other times Compensation includes stock options with two year vesting

period

• Employer is a construction contractor; it may have 50-100 workers in a state for 4-6 months

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State Withholding and Reporting

• Compliance: Third-Party Information Reporting & Self Reporting 1.2% net misreporting for amounts subject to 3rd party

information reporting and withholding (wages) 4.5% net misreporting for payments subject to 3rd party

information reporting only (interest or dividend income) 8.6% net misreporting for amounts subject to partial 3rd

party information reporting (capital gains, p’ship income) 53.9% net misreporting for amounts not subject to 3rd party

information reporting or withholding (rents, sole proprietor income)

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Source: Reducing the Federal Tax Gap – A Report in Improving Voluntary Compliance, IRS (08/2007).

©2015 Sutherland Asbill & Brennan LLP 6


• Tax Types Under Scrutiny Personal income tax withholding Unemployment insurance contributions 1099 compliance, including worker classification

• Why Do Multistate Employers Care? Typically involve high-ranking or well-compensated employees Publicity of noncompliance HR Issues – “why are you withholding now?”

– resistance by employee to multistate filing obligation and credit complexity

Increase in use and complexity of deferred compensation Audits increasing and 100% compliance is nearly impossible Effect on telecommuting activities Significant system complexity



• Why do States care? Revenues and budget shortfalls! Tax on non-residents (non-voters) Enforcement of existing tax laws not a “new tax”

• Which States are aggressively auditing? State employer withholding and personal income tax Unemployment insurance 1099s

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MOBILE WORKFORCE & STATE EMPLOYMENT TAXES


Overview of State Withholding

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State Withholding – Basics

• Employee Nexus Residency versus source taxation

• Employer Nexus Constitutional Overlay with corporation income tax, e.g., P.L. 86-272 Statutory

Example: New Jersey – “employer maintaining an office or transacting business within this state and making payment of any wages subject to New Jersey personal income tax or making payment of any remuneration for employment subject to contribution under the New Jersey ‘unemployment compensation law’...” 54A:7-1(a)

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State Withholding – Basics

• Separate and distinct from employee’s obligation to file personal income tax returns Penalty versus tax Problems with proving employee separately reported and

paid tax

• Where to withhold? Where is service performed? New York’s “convenience of employer” test exception Reciprocity agreement? Consideration of credit in resident

state on withholding

• State Registration

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When to Withhold?

• Relevant standard varies by State Days worked in state Dollars earned in state Combination No tax – Alaska, D.C. (non-residents), Florida, Nevada, New

Hampshire (intangibles only), South Dakota, Tennessee (intangibles only), Texas, Washington, Wyoming

• Triggering threshold varies by state Number of working days

Any part of a day (“hour equals a day” rule) Actual work done No specific threshold – but state has personal exemption

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When to Withhold?

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• Examples: Connecticut – 14 working days per year North Dakota – 20 working days per year (MTC Model) Georgia – 23 days per quarter or in-state wages exceed 5%

of total compensation Arizona – 60 days per year Montana – in-state income exceeds $3860 of federal gross

income

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New York State’s 14 Day Rule

• Taxation and Finance audit guidelines provide an employer need not withhold tax from an employee’s compensation if it reasonably expects that employee will spend 14 working days or less in the state.

• On the 15th working day, withholding is required from the first working day in New York. “Reasonable” number of training days do not count towards 14 day

threshold. Connecting at LGA/JFK does not count towards 14 day threshold. Does not apply to deferred compensation paid to nonresidents that earned

the compensation (grant to exercise) while working in New York. Does not apply to professional athletes or entertainers.

• “One hour equals a day.” Entering into New York for any part of the day to perform work on behalf of

the employer will count as a full day towards the 14-day limit. Potential for double withholding (but likely not double taxation due to credit

mechanisms).

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©2015 Sutherland Asbill & Brennan LLP 15

Overview of Thresholds

WA

ID

AZ NM

LA

AL

ME

HI

CT MA

AK

AR

CO MD

CA KS

FL

GA

IA

IL

MI

MN

MO

MT

NC

SC

VA WV

WY

OK

NY

PA

OR ND

NV

NH

OH

RI

VT

NJ

TX

UT

SD

NE

MS

TN

KY

IN

WI

©2008 Sutherland

DE

Nonresident employees subject to tax withholding on first day of travel

Nonresident employees subject to tax withholding after reaching threshold

No general personal income tax (or, in the case of Washington, DC, no tax on nonresidents)


How Much to Withhold?

• Allocation Based on days worked in state versus total work days

• Portion reasonably attributable to personal services performed in the state

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Employer Compliance, Audits, and Solutions


Employer Compliance

• Compliance Options Zero compliance? Partial compliance

No set policy, withhold on ad hoc basis (e.g., special, long-term projects)

National policies and procedures May be tied to employee-level, wage-level, or both

Full Compliance Often not practical (or possible) for many large,

multistate employers

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Employer Compliance

• Develop Policies and Procedures Considerations and difficulties

Exposure analysis Establish withholding thresholds Track employee travel, expenses, etc.

Factors affecting Policies and Procedures Frequency of employee travel Audit risk (Visibility? Salaries? Other comp/bonuses?) Potential adverse HR issues

• Issues When Employee Crosses Threshold When to begin withholding?

Withhold from day one (e.g., New York)? Withhold from day employee crosses threshold?

Reporting – when to “true up”? Communication with employee

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Employer Compliance

• Worker Classification: Employer vs Independent Contractor State standard may differ from federal standard

Availability of Section 530? Reporting and withholding issues if state classification

different than federal

• Voluntary Disclosure Agreements (VDAs) Employer a party to the VDA, but more often than not,

affected employees are not Hold harmless for employees

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Audits

• Audit Defense

• Failure to withhold for multistate employees & responsible person issues

• Having policies in-place may mitigate exposure/penalties

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Solutions – Uniformity

• Federal Mobile Workforce Legislation (S. 386) Addresses problem of nonresident withholding and liability

of traveling employees 30-day safe harbor before state rules apply N/A for athletes, entertainers and other prominent persons Other “gaps” Status update

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Solutions – Uniformity

• Multistate Tax Commission Function of MTC Overview of Model Act

20-day threshold Disagreement among the States Next steps in uniformity process Likelihood that States will adopt

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Special Problems


Employee Benefits

• Source Tax Act • Common issues with other payments

Bonuses Stock Options Other Deferred Compensation Non-Compete Agreements Severance

• Windsor – imputed income issues

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Telecommuting

• Telecommuting employee likely creates nexus for out-of-state employer Telebright Consider whether ownership of property is relevant

• Impact on other state and local taxes? Business activity taxes (income, gross receipts, net worth) Sales and use taxes Personal property taxes

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Local Taxes

• Local withholding or payroll-based taxes Identification of localities Imposition may be on employee or employer Wynne Different sourcing rules than state Different base

• Problematic Jurisdictions Wilmington New York City Pennsylvania localities

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Federal Preemption

• Congress has enacted several industry-specific laws that fully or partially prohibit states from withholding from wages of certain non-resident employees working for: Railroads. 49 USC §11502 (4-R Act). Airlines. 49 USC § 40116 (Anti-Head Tax Act). Fishing vessels, or vessels engaged in “foreign, coastwise,

intercoastal, interstate, or noncontiguous trade.” 46 USC § 11108.

Motor Carriers. 49 USC §14503.

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Unemployment Insurance


Unemployment Insurance

• Sourcing is different than withholding – pay into one state

• Which State? Apply four tests in succession: Place where work is localized (“localization test”); Location of employee’s base of operations (“base of

operations test”); Location from which operations are directed or controlled

(“control test”); Location of employee’s residence (“residence test”).

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UI – Common Issues

• Who is the “employer” that must contribute? Importance – experience rating v. new employer rate States may not always follow common paymaster rules

(federal) California, e.g., adopts a unity of enterprise test (vertical or

horizontal) to determine which entity among related parties is truly the employer

• Worker classification • General M&A – “SUTA Dumping”

Potential criminal penalties

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NON-WAGE PAYMENTS AND 1099 COMPLIANCE

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Overview

• Various federal Forms 1099 (information reports), required to be given to payee and used by the IRS and state DORs to detect unreported payments

• Form 1099-MISC, generally, for reporting payments to non-employees of $600 or more, in the aggregate, for the calendar year (in relevant part): Commissions, fees, and other compensation for services

paid to non-employees in the course of a trade or business requirement; or

If backup withholding required.

• Possible penalties for non-compliance

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State-Level 1099 Reporting

• State 1099 reporting varies by, e.g., federal form used, type of payment, payment amount, residency status of payee

• During the last decade, states have notably increased

1099 reporting requirements and related compliance efforts Declining revenues; closing “tax gap” Increased information sharing with IRS and related

initiatives, e.g., worker classification (“employee” v. “independent contractor”)

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Federal/State Combined Filing Program

• 37 participating states, but a number of those states still require state-level filing, and does not include local jurisdictions

• Forms 1099: DIV, G, INT, MISC, OID, PATR, R (but

not K) • Does not include state “new” contract reporting at the

beginning of the relationship

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Backup Withholding

• At the federal level, backup withholding (28%) is required to non-employee payments if: The payor does not gather the following information from the

payee’s W-9: Name Address TIN; or

IRS sends the payor notification of incorrect name/TIN, requiring the payor to send notices (“B-notices”) to payee

• If federal backup withholding is required, several states require backup withholding

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Compliance Initiatives & Audit Activity

• Focus on Misclassification IRS initiative and correlative state DOR initiatives Inter-governmental and inter-agency

Significance of DOL and state labor agencies

• Local governments may require payors to submit 1099-MISCs For example, payors must file Louisville, KY Form 1099-SF

for non-employee compensation of $600 or more for services in the Louisville metro area

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QUESTIONS?


Contact

Todd Lard

202.383.0909 [email protected]

Charlie Kearns 202.383.0684

[email protected]

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todd lard charlie kearns tei nebraska february 17, … · example: new jersey ... new york...

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