1 Practices for Handling Multistate Taxation - Ascentis · Practices for Handling Multistate...

Fundamentals and Best Practices for Handling

Multistate Taxation

©2015 The Payroll Advisor

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Presented Thursday, April 16, 2015

Housekeeping


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Credit QuestionsToday’s

topicSpeaker

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Be watching using your unique URL

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by May 15th

About the Speaker

Vicki M. Lambert, CPP, is President and Academic Director of Vicki M. Lambert, LLC, a firm specializing in payroll education and training. Known as “The Payroll Advisor,” Ms. Lambert is Founder and Director of www.thepayrolladvisor.com, a website that provides unique and expert services for anyone dealing with the complexities and technicalities of the payroll process.

As an adjunct faculty member at Brandman University, Ms. Lambert is the creator and instructor for the Practical Payroll Online payroll training program, which is approved by the APA for recertification credits.

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http://www.thepayrolladvisor.com/

What Is Our Focus For Today?


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Taxes that could be required including:

Income, SUI, SDI, and Local

Following the IRS Code—where the states stand

Determining State Withholding Liability

Reciprocal Agreements

Resident vs. Nonresident

Withholding Allowance Certificates

4 Factor Test for SUI

Our Example for Today


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We have a HR manager who lives and works in Newark, New Jersey three days a week, works one day a week in New York City and one day a week in New Haven, Connecticut at each of the companies subdivisions…What taxes is she subject to? For what taxes are we an employer? What do we have to withhold, pay or provide?

Taxes


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Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington & Wyoming have no state income tax or do not require withholding

All states and D.C. have SUI

5 states have SDI or TDI including California, Hawaii, New Jersey, New York and Rhode Island (also Puerto Rico)

And then there are local taxes

MT

WY

ID

WA

OR

NV

UT

CA

AZ

ND

SD

NE

CO

NM

TX

OK

KS

AR

LA

MO

IA

MN

WI

IL IN

KY

TN

MS AL GA

FL

SC

NC

VAWV

OH

MI

NY

PA

MD

DE

NJ

CTRI

MA

ME

VT

NH

AK

HI

Has local taxation

States with Local Tax Requirements

©2015 The Payroll Advisor9

Examples of Local Taxes

Employer or Payroll Expense Tax

License Fee

Earned Income taxes--Pennsylvania’s “Act 32”

Income Tax

County taxes

Payroll Tax

School District taxes

Occupational Privilege tax

Transportation taxes

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©The Payroll Advisor, 2015

Following the IRS Code


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Majority of the states have adopted a policy that states the withholding requirements are the same as the federal income tax withholding

CA, MS, NJ and NM have their own code

Other states follow a version of the IRC—But which version?

The states can follow the current version of the IRC—or only as of a certain date

States vs. IRC


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Area to watch: same-sex marriage and health insurance

States that follow current code include: Alabama, Colorado, Connecticut, Delaware, DC,

Illinois, Indiana, Kansas, Louisiana, Maryland, Michigan, Missouri, Montana, New York (with exceptions), North Dakota, Oklahoma, Rhode Island, and Utah

So if IRC changes, state changes automatically

States that Follow IRC as of a Certain Date

January 1, 2015: Arkansas, Idaho, Iowa and North Carolina

December 31, 2014: Georgia, Maine, Minnesota, Virginia, South Carolina and West Virginia

February 26, 2015: Nebraska

December 31, 2013: Hawaii, and Oregon

January 1, 2012: Arizona March 22, 2013: Ohio December 31, 2010:

Wisconsin

April 5, 2010: Nebraska Jan 1, 2005:

Massachusetts Jan 1, 1997: Pennsylvania

(may have sections with different dates)

Or they pick a specific time frame or date:

Vermont: Taxable year 2013

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Are You an Employer?


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First question that must be asked—What taxes are required?

Second question that must be asked—are you an employer for that tax? Are you required to withhold or pay?

Final question—where is the employee a resident?

For every tax—for every employee

It is their rules not your opinion and never what is logical

Determining State Withholding Liability—Are You an Employer?


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State laws vary somewhat in their definitions of “employer” subject to withholding requirements. Some follow federal definitions while others have their own. Some common definitions include:

Does business within the state

Pays wages for services to one or more persons whose services are rendered in the state

Maintains an office or other place of business within the state

Derives income from, or takes orders within the state

In Other Words…


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Do you have a nexus within that state?

The word means: A link, a tie, a connection to something

Established by having a business presence in the state as discussed on previous slide

When it comes to withholding taxes a nexus means you have to withhold

Applies to both the resident state and the working state—where is the nexus?

To Determine Withholding


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Ascertain the following to determine withholding:

1. In which state is the work performed

2. The state of residency for the employee

3. Reciprocal agreements in place, if any

4. Rules for residents or nonresidents for work state

Making the Determination on Taxation


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State Working State Living

Rules for this state for

a nonresident working

here including

reciprocal agreements

Rules for when a resident

from this state works in

another state including

any reciprocal agreements

Based on all we have covered the employer then

determines the income tax withholding

Best and easiest way is to T-account it

What is the employer’s

nexus?

Definition of Resident


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Usually set forth in the state’s income tax laws

Generally: someone who maintains a place of abode or live in the state for a certain period of time

Example: Withholding in NJ for SIT


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Our example employee is a resident of New Jersey so:

As a New Jersey employer, you are required to withhold New Jersey income tax from wages paid to all New Jersey residents unless you are withholding another jurisdiction's income tax at a rate equal to or greater than New Jersey's rate.

This is considered a “special agreement”

Are You an Employer In NY for SIT or City Income Tax?


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If you are an employer as described in federal Publication 15, Circular E, Employer's Tax Guide, and you maintain an office or transact business within New York State, whether or not a paying agency is maintained within the state, you must withhold personal income tax.

Who you must withhold tax for:

New York State residents earning wages even when earned outside of the state

New York State nonresidents being paid wages for services performed within the state

New York City residents even when services are performed outside New York City

Note: Employees who claim they are not a resident of New York State, New York City, or Yonkers must certify they are not a resident and estimate the percentage of their wages and other compensation attributable to services in New York State or Yonkers.

http://www.irs.gov/pub/irs-pdf/p15.pdf

Are You an Employer in CT for SIT?


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Are You an Employer In NJ for SUI/TDI?


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When an employee performs services for the same employer in New Jersey and in some other state(s), the question of whether that employee is covered by the New Jersey Unemployment Compensation Law is determined by the tests of Sections 19 (i) (2) (A) and (B). Similar tests exist in the unemployment compensation laws of other states to avoid conflict and overlapping of coverage.

The application of these tests will result in the reporting to one state of the employee’s total wages in all states. The tests are to be applied to the employee, not to the employer, in the following order: (A) localization of service; (B) base of operations; (C) place of direction and control; (D) residence of employee.

Are You an Employer In NY for TDI?


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An employer who has had in New York State employment one or more employees on each of at least 30 days in any calendar year shall be a "covered employer" subject to the Disability Benefits Law after the expiration of four weeks following the 30th day of such employment (WCL §202). These 30 days of employment need not be consecutive days but must be work days of employment in one calendar year.

Are There Any Local Taxes?


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1. Newark Payroll Tax—you will allocate for the non-Newark wages

2. New York City—None for nonresidents

3. None for New Haven

Reciprocal Agreements


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A number of states have entered into reciprocal agreements with other states to ensure that employees who work and reside in different states are not subject to multiple withholding or taxation

The agreements specify that employers should withhold income taxes on a nonresident employee’s wages only for the worker’s home state and that such employee’s wages are not subject to the income tax rules of the state where the wages were earned

Watch out for local taxes usually do not apply

There can be “special” agreements as well

Reciprocal Agreement Chart


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State Reciprocal

Agreements With:

State Reciprocal Agreements

With:

Illinois Iowa, Kentucky, Michigan &

WisconsinNew Jersey Pennsylvania

Indiana Kentucky, Michigan, Ohio,

Pennsylvania & WisconsinNorth Dakota Minnesota & Montana

Iowa Illinois Ohio Indiana, Kentucky, Michigan,

Pennsylvania & West Virginia

Kentucky Illinois, Indiana, Michigan,

Ohio, Virginia, West Virginia &

Wisconsin

Pennsylvania Indiana, Maryland, New Jersey,

Ohio, Virginia & West Virginia

Maryland D.C., Pennsylvania, Virginia &

West VirginiaVirginia Kentucky, District of Columbia,

Maryland, West Virginia and

Pennsylvania

Michigan Illinois, Indiana, Kentucky,

Minnesota, Ohio, & WisconsinWest Virginia Kentucky, Maryland, Ohio,

Pennsylvania & Virginia

Minnesota Michigan & North Dakota Wisconsin Illinois, Indiana, Kentucky &

Michigan

Montana North Dakota District of

Columbia

Maryland and Virginia

For Example


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WI has agreement with IL

Resident of IL works in WI but does not want WI tax taken out—completes Form W-220—NO WI tax is withheld

Employer may but IS NOT required to withhold for IL

Wisconsin

Illinois

Works

Resides


Wisconsin requires:

Illinois requires (Pub 130 page 6): When completing the W-2, enter only the

amount of wages paid in Illinois or paid to an Illinois resident employed in

Iowa, Kentucky, Michigan or Wisconsin in Box 16.

Resident vs. Nonresident


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Resident: generally must have state income tax withheld from all payments not specifically exempted, including wages for services performed outside the state

Nonresident: compensation is subject to withholding only to the extent it is earned within the state

Sometimes states will allow residents to use credit for other state against tax liability

Example: Nebraska


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Nonresidents whose wages are subject to federal withholding and who work in Nebraska are subject to the same withholding on their entire wages as that used for Nebraska residents.

Connecticut Example


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Dec, 2009: Employers are not required to withhold Connecticut income tax from wages/compensation paid to nonresident employees for services performed in Connecticut provided said employees are assigned to a primary work location outside of Connecticut and work in Connecticut 14 or fewer days during a calendar year. --Still report

Maine Example


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Compensation for personal services performed in Maine as an employee is Maine-source income subject to taxation if the nonresident taxpayer is present in the state performing personal services for more than 12 days during that tax year and directly earns or derives more than $3,000 in gross income during the year in Maine from all sources.

Maine Example


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Performance of the following personal services for 24 days during a calendar year is not counted toward the 12-day threshold:

personal services performed in connection with presenting or receiving employment-related training or education;

personal services performed in connection with a site inspection, review, analysis of management or any other supervision of a facility, affiliate or subsidiary based in Maine by a representative from a company, not headquartered in Maine, that owns that facility or is the parent company of the affiliate or subsidiary;

personal services performed in connection with research and development at a facility based in Maine or in connection with the installation of new or upgraded equipment or systems at that facility; or

personal services performed as part of a project team working on the attraction or implementation of new investment in a facility based in Maine.

Employee Withholding Certificates—The States


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Employers must verify if the state has an equivalent form to the IRS Form W-4

The States may: Not have their own form and use the Form W-4 Have their own form but allow Form W-4 to be used Require only the state form be used

Best Practice Recommendation: If they have a form it should be used

Examples


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Arizona: Form A-4 is required

California: DE4 required if withholding is different from federal withholding

Idaho: No state form

Possible Other Forms on State Level


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Special forms for employee to claim exempt from state income tax

Forms for nonresidents of the state

Reciprocal agreement forms

Example of Nonresident Form-CT


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Completes the form if the employee is a nonresident who performs services partly within and partly outside of Connecticut for same employer

Must also complete Form CT-W4

Guidelines—Employees Working in 2 or More States


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Still using the rules just discussed as to resident and nonresident etc.

Some states provide guidelines for computing the allocation of withholding liabilities when employees work in more than one state

There are three commonly approved formulas

Volume of business ratio

Time Basis

Mileage Basis

Volume of Business Ratio


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Where an employee’s compensation depends directly on the volume of business transacted by that employee tax withholding attaches to that portion of the wages determined by ratio of volume of business transacted within the jurisdiction to the total volume of business transacted by the employee

Time Basis


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Where an employee is paid on a daily, weekly or monthly basis, tax withholding attaches to that portion of the employee’s pay determined by the ratio of working hours within the taxing jurisdiction to the total working time

Example:

Human Resources Manager paid on salary

Mileage Basis


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Where an employee is paid on a mileage basis, tax withholding attaches to that portion of the employee’s pay determined by the ratio of actual mileage within the taxing jurisdiction to the employee’s total mileage

Example:

Delivery driver just passing through

Form W-2 Reporting Resident of NJ


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NY Example-Nonresident


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CT Nonresident Example


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The Form W-2 must show the correct amount of Connecticut wages paid during the calendar year and the correct amount of Connecticut income tax withheld from wages during the calendar year.

In box 16 enter total wages paid during the calendar year which are attributable to services performed in Connecticut by the employee.

Telecommuting


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Do you withhold for the state where the work is sent (the employer state) or where the employee is performing the work?

Most states it is where the work is performed—such as Oklahoma’s recent decision

An employee who moved out of Oklahoma but still works for the same employer by telecommuting is not subject Oklahoma nonresident income tax because the salaries, wages and commissions are for work performed outside of Oklahoma and the employee derives no income from sources within the state of Oklahoma. Accordingly the employer does not withholding Oklahoma state income tax from the wages.

Telecommuting


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Watch out for Delaware, Pennsylvania, Nebraska and most especially New York

“convenience of the employer” rules

If telecommutes out of the employer’s necessity then take tax where work is performed

Hard to prove in New York

Four Factor Test for SUI


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The states have adopted uniform rules to help them determine which state has the right to claim coverage of employees who work in two or more states for an employer. Employers consider the following four factors in successive order:

Localization of services

Base of operations

The place of direction or control

Place of residence

Localization of Services


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Services performed partly within and without the state will be covered by state law if the work performed outside the state is incidental to the work performed in the state.

Incidental means transitory or temporary or isolated instances or transactions

Example


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Localization of Services: A payroll clerk normally works at the company’s headquarters in Georgia. Due to the acquisition of a firm in Alabama the payroll clerk is sent to that state for three months to change over the payroll system. Georgia retains jurisdiction even during the period the payroll clerk is working in Alabama.

Base of Operations


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If a worker normally or regularly works in two or more states the employee’s services can’t be said to be localized in one state. The next best claim to jurisdiction is the state where the employee performs some services and in which the base of operations is located

Base of operations means the place where employees report for work or customarily return to

Example


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Base of Operations: A New York based company employs a regional sales manager to cover the states of PA, NJ and MD. The sales manager works out of an office in PA and divides his time fairly evenly among the three states. His activities are directed and controlled from the New York office. Pennsylvania has jurisdiction since the sales manager’s services aren’t localized in any one state and the base of operations is in PA.

Place of Direction or Control


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If the prior two tests aren’t applicable then the employer goes to the next best claim of jurisdiction which is the state in which the employee performs some services and which is the place of direction or control

The determinant is the place of immediate or potential control even if the control is exercised only rarely

Example


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Place of direction or control: A salesperson covers the DC metropolitan area including parts of DC, VA and MD. The salesperson has no primary base of operations and is under standing orders to call in at least daily to the company headquartered in DC. DC has jurisdiction in this instance since services aren’t localized, no primary base of operations and the salesperson receives direction and control from the DC office

Place of Residence


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If the prior three tests don’t establish jurisdiction the state of jurisdiction becomes the one in which the employee both performs some services and maintains a place of residence

Example


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Place of Residency: An equipment manufacturer in Detroit has an employee who supervises equipment installations and handles complaints from customers in IN and OH. The employee has no particular place of operations but lives in Ohio. The state of jurisdiction is Ohio.

Reciprocal Coverage Agreements


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Most states subscribe to the Interstate Reciprocal Coverage Arrangement

Permits employers to cover services in a single state by election of the employer

All services will be covered in any state either in which any part of the services are performed, the employee resides or where the employer maintains a place of business

States accept and pay contributions on each other’s behalf to assure that services provided by multistate employees are not covered under more than one state

Example


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A construction engineer who works for a Texas firm on a job in New Mexico for four months and who then goes to CA for six months on a job might be covered under both New Mexico and California laws. Under the interstate reciprocal arrangement, the Texas firm could elect to cover all the services performed by the engineer under Texas law

Are There Any Questions?


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How Can Ascentis Help Me?

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