Multistate payroll compliance When, how and why it matters · Page 8 Multistate payroll tax...

Multistate payroll compliance

When, how and why it mattersApril 21, 2017

Multistate payroll tax compliance

Disclaimer

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► The views expressed by the presenters are not necessarily those of Ernst & Young LLP.

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Today’s agenda

► Sourcing wages to the right state ► Onboarding ► Nonresident income tax considerations ► Key facts about income tax withholding

and reporting ► US foreign nonresident considerations► Latest developments► Payroll tax audits ► Audit flags, risk assessment and

remediation ► Benchmarking compliance


►Sourcing wages to the right state


State unemployment insurance sourcing rules (the four-prong test)

Employer ► Where wages are paid, and► There is a covered employee

Covered employee► Applies only in one state at a

time ► Temporary work incidental to

main job location is notconsidered

The SUI state is where the employee performs some work, and (in this order): ► Where the work is

localized; ► The employee’s

base of operations; or ► The employee’s place

of control. ► If none of the above:

► The employee’s residence

US Department of Labor, Program Letter 20-04


Unemployment insurance sourcing Example

Employer ► Headquarters office is New York► Employment and employees are

UI covered in all states

Employee ► Works across two states,

Texas and Louisiana ► Home office is in Texas ► General manager is in

New Mexico

The employee work state is (in this order): ► Where the work is

localized (N/A)► Employee’s base of

operations (Texas)► Employee’s place of

control (New Mexico)

If none of the above: ► Employee’s

residence

Since work is not localized in one state and Texas (rather than New York) is the base where the employee normally receives instructions, mail, etc., Texas is the SUI state.


State income tax sourcing basicsUnderstanding nexus for resident income tax withholding

► If a company conducts business or otherwise has a business connection to a location, nexus is generally triggered

► What constitutes nexus for income tax withholding purposes can vary by state and local law and can also vary for other business taxes (sales & use, franchise and corporate taxes); however, employee work presence in the state is one factor generally considered

► Courtesy income tax withholding ► Some employers withhold resident income tax

even in the absence of nexus► Keep in mind that special registration or

communications may be necessary to avoid incorrect assessments for unemployment insurance (where it is not applicable) as well as other business taxes


State income tax sourcing

Nonresident state► All services here are

subject to income tax withholding unless de minimisor other exemptions apply

► Keep in mind, nonresident employment can trigger nexus

Nexus exists if:► Employee works from

home office and such employment constitutesnexus under jurisdiction’s law

► Employer has permanent establishment or propertywithin the jurisdiction (e.g., office, plant or other assets as specified under state law)

► Employees perform services in the jurisdiction of the nature that constitutes nexusunder the jurisdiction’s law

Resident state ► Employee resident state is

determined based on length of timeemployee is present in the state

► Income tax withholding on wagesis required if employer has nexusin this state


►Onboarding considerations


US employee onboarding process

Yes

Common law or statutory employer ?

Federal Form W-4

State/ local Form W-4

Copy of US Social Security card (optional)

Form W-9 or foreign taxpayer equivalent

Common law or statutory employee

Independent contractor or statutory nonemployee

Worker is hired

►Employee legal name ►Resident address ►Social Security Number (SSN) ►Information for computing

income tax withholding

Form W-4, Employee’s Withholding Allowance Certificate

►Employee legal name ►Resident address ►Taxpayer Identification

Number (SSN, EIN or ITIN*)

Form W-9, Request for TaxpayerIdentification Number (TIN)

*ITIN is an Individual TaxpayerIdentification Number is issued to foreign persons unable to secure an SSN and isrequested using Form W-7

Read more about federal and state Forms W-4 here.


Which states and localities have payroll taxes?

Source: Tax Foundation

HI FL

AK

NJ

DC

DEWV

NC

SC

GA

IL OHIN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

COUT

WY

MT

WA

ORID

NV

CAVA

MDMD

ME

RI

VTNH

MANY

CTPA

State and local income tax in one or more locations

No income tax withholding

WA

AKState income tax withholding

AK


When is a separate state Form W-4 required?

HI FL

ME

RI

VTNH

MANY

CTPANJ

DC

DEWV

NC

SC

GA

IL OHIN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

COUT

WY

MT

WA

ORID

NV

CAVA

MDMD

Federal Form W-4 not allowed


WA

AKState income tax withholding

AK


States may have more than one certificate for income tax withholding

Type of form Purpose

Certificate of exemption Employee is claiming exempt from income tax withholding

Certificate of exemption (native Americans) Same as above for native Americans

Certificate of exemption (military spouse)

Employee is spouse of military person and is claiming exempt from state income tax under the Military Spouses Residency Relief Act

Certificate of nonresidenceEmployee is claiming exempt from nonresident income tax, usually under a reciprocal agreement


How do you know what state and local tax applies?Geocode software works like your cell phone’s GPS navigation system except that it also tracks the tax boundaries and tax rates that apply. Below is a free application made available for Pennsylvania local taxes at http://munstats.pa.gov/Public/FindLocalTax.aspx


State reciprocal agreementsAn exception to the nonresident income tax requirement

► Some states have entered into reciprocal agreements (usually with bordering states) where nonresident state income tax is not required ► Example: Under Indiana’s

reciprocal agreement, income tax withholding is not required for services performed in the state by residents of Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin if employees have properly completed and filed Indiana Form WH-47 with the employer

► Generally, the exemption from nonresident income tax under a reciprocal agreement doesn’t apply unless the employee files the required certificate with the employer (usually, a certificate of nonresidency)

District of Columbia

Montana

Illinois New Jersey

Indiana North Dakota

Iowa Ohio

Kentucky Pennsylvania

Maryland Virginia

Michigan West Virginia

Minnesota Wisconsin

States and District of Columbia with reciprocal agreements


►Nonresident income tax considerations


Multi-state resident income tax withholdingThere is no one-size fits all approach

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1 Reduce by amount of income taxwithheld in another state(e.g., Massachusetts)

2 Not required if nonresident incometax applies in nonresident state(e.g., Alabama)

3 Wages earned outside of the stateare specifically exempt from incometax withholding (e.g., Arizona)

4 Wisconsin excludes Minnesota nonresident wages from resident income tax withholding


State reciprocal agreementsAn exception to the nonresident income tax requirement

► Some states have entered into reciprocal agreements (usually with bordering states) where nonresident state income tax is not required ► Example: Under Indiana’s

reciprocal agreement, income tax withholding is not required for services performed in the state by residents of Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin if employees have properly completed and filed Indiana Form WH-47 with the employer

► Generally, the exemption from nonresident income tax under a reciprocal agreement doesn’t apply unless the employee files the required certificate with the employer (usually, a certificate of nonresidency)

District of Columbia

Montana

Illinois New Jersey

Indiana North Dakota

Iowa Ohio

Kentucky Pennsylvania

Maryland Virginia

Michigan West Virginia

Minnesota Wisconsin

States and District of Columbia with reciprocal agreements


Nonresident income tax withholdingApportionment rules vary by jurisdiction and earnings type

Regular pay. For example, apportionment may be based on wages/fringes paid in state x [days worked in state for the year ÷ total days in the year]

Performance pay. For example, apportionment may be based on 100% of commissions and bonuses earned within the state (without regard to days worked in the jurisdiction).

Trailing compensation. Nonresident income tax may apply to amounts earned for services provided in the state, regardless of when they are paid or where the employee resides or works at the time of payment (e.g., stock, nonqualified deferred compensation, lump sum paid leave, residuals for entertainers, etc.)

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Trailing compensation Sourcing delayed wage payments to the jurisdiction earned

In 2016, employee is relocated to

Nevada and is paid bonus

In 2015, bonus is earned in New York

► In many US states and localities, lump sum payments such as accrued paid time off, severance, equity compensation and nonqualified deferred compensation must be sourced to the jurisdiction(s) where the compensation was earned for income tax withholding purposes

► For US state income tax purposes, an exception applies to qualified retirement and to top heavy plans (Supplemental Executive Retirement Plan (SERP) or nonqualified deferred compensation) that are paid in substantially equal periodic payments over a period of not less than ten years (P.L. 104-95)

In 2015 and 2016, employee lives and

works in New Jersey and is paid

bonus in 2016

In 2015, employee

works part-time in New York and

earns bonus

Scenario 1

Scenario 2


Federal-state protectionsOne exception to the nonresident income tax requirement

► At various times, federal legislation has been enacted to limit a state’s ability to impose income tax on out-of-state businesses and individuals. Following are some of these laws: ► Pension plans. In 1996, federal legislation under P.L. 104-95 was enacted

to prevent states from taxing certain pension income paid to individuals no longer a resident

► Interstate Income Act of 1959. P.L. 86-272 prohibits a state from imposing income tax pursuant to activities constituting solicitation of orders for sales of tangible personal property when orders are filled or shipped outside of the state

► Interstate transportation. Motor carriers (49 USC 14503(a); Rail carriers (49 USC 11502); Water carriers (49 USC 14503(b)(2); Air carriers (49 USC 40116(f)(2)

► Military Spouse Residency Relief Act. See more here.


Telecommuter considerationsThe home office could be a local business office

► If employees regularly work from home, the home office could be treated as a work location of the employer in many states (and localities)

► If the home office is deemed an employer work location, the business can be subject to income tax withholding, unemployment insurance and other businesses taxes

► In a New Jersey case, it was determined that a foreign corporation with a principal place of business in Maryland was subject to New Jersey’s corporate income tax requirements because one of its employees was allowed to work on a full-time basis from her New Jersey home office (Telebright Corporation v. Director, N.J. Super. Ct. App. Div., Dkt. No. A-5096-09T2, 03/02/2012)


Telecommuter considerationsNonresident income tax may apply in the headquarters’ state

Double taxation under “convenience of the employer” rule► Some states (e.g., New York) take the position that 100% of the

wages paid to a nonresident are subject to New York income tax if the employee is working out of state for the employee’s own convenience

► The rule applies when an employee receives direction and control from a New York location

► To argue that work location is for the employer’s convenience, there must be a direct business benefit in having the employee work outside of New York

► The rule can result in double taxation (e.g., tax in both the resident state and New York)

► The US Supreme Court declined to hear a challenge concerning the constitutionality of this law (Zelinsky v. Tax Appeals Tribunal)

► Double taxation under the“convenience of the employer” rule


►Key facts about income tax withholding and reporting


The top most misunderstood factsCommon withholding tax errors occur in these areas

1The New York 14-day rules don’t extend to employees’ personal income tax obligations.

2 Income tax exemptions under tax treaties and reciprocal agreements are not necessarily automatic.

3 Employers are responsible for knowing where their employees are working and the tax that applies.

4 Employee work at home may be considered a place of business for resident nexus purposes.

5 Employees working from home may owe tax in the corporate office state. .

6A federal tax treaty exemption does not necessarily apply to state and local taxes.

7 Income tax may continue to apply to trailing compensation even after the employee transfers to another state.

8 Computation of resident income tax varies when employees work outside of the state.

9 Federal law prohibits nonresident income tax for certain industries and payments.

10 Short-term work assignments are not necessarily disregarded for nonresident income tax purposes.


Nonresident income tax for short assignments Only 23 states have an exemption based on days or earnings

De minimisnonresident income tax exemption

HI FL

AK

ME

RI

VTNH

MANY

CTPANJ

DC

DEWV

NC

SC

GA

IL OHIN

MIWI

KY

TN

ALMS

AR

LATX

OK

MOKS

IA

MN

ND

SD

NE

NMAZ

COUT

WY

MT

WA

ORID

NV

CAVA

MDMD

WA


State income tax withholding

WA

AK


►US foreign nonresident considerations


The three traveler tax profiles to considerWhere you came from and where you are going matters

3US outbound

1US inbound and outer continental shelf (federal)

2Cross bordertraveler (state andlocal)

► Income tax treaties

► Totalizationagreements

► US visa status► Federal-only

jurisdictions in US off-shore waters

► Nexus ► Federal-state

tax preemption ► De minimis

threshold ► Reciprocal

agreements

► When do US federal, state and local taxes continue toapply whenUS residents go to anothercountry?

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US Outer Continental Shelf (OCS)Offshore federal-only tax jurisdictions

Paci

fic O

CS

Alas

ka O

CS

Gulf of Mexico OCS

Atlantic OC

S

US Outer Continental Shelf (OCS)

Begins 3 to 9 nautical miles from state’s shore

Foreign employers and employees working in the OCS are generally subject to the same US federal withholding and employment tax obligations as foreign employees working inland except that US state and local taxes do not apply

► Social Security and Medicare tax apply to the employer and its OCS employees (totalization agreements may apply)

► Federal unemployment insurance (FUTA) tax applies without regard to employees’ eligibility for unemployment benefits

► In the absence of a treaty exemption, federal income tax withholding applies (IRS Industry Director Directive 2)

Nonresident alien employees that perform services on structures permanently or temporarily attached to the OCS, or on vessels or other devices engaged in activities related to the exploration for, or exploitation of, natural resources on the OCS, are generally engaged in a US trade or business.


US federal employment taxes Nonresident aliens in the US

1 Social Security and Medicare(FICA)

2 Federal Unemployment Insurance (FUTA)

► Applicable to wages connected with services performed within the US by most employees

► Special rules apply to flight crews and members of vessels

► Exclusion applies to employees holding these US Visas: F1, J1, M1, Q1, or Q2

► Employees who pay social tax in another country, may clam exclusion if there is a Totalization agreement between that country and the US (generally limited to 5 years). Employer must have certification of social coverage in the foreign country

► For 2017, employee pays 6.2% on wages up to $127,200, 1.45% on all wages, and 2.35% on wages over $200,000

► For 2017, employer pays 6.2% on each employee’s wages up to $127,200 and 1.45% on all wages

► Apples to all covered employers having employment within the US

► An employer (including a foreign employer) is covered if:

► During any calendar quarter in the calendar year, or during the preceding calendar year, paid wages of US$1,500 or more, or

► Employed at least one individual for some portion of each day for 20 days during the calendar year, each day being in a different calendar week.

► Exclusion applies to employees holding these US Visas: F1, J1, M1, Q1, or Q2

► For 2017, employer pays 6.0% on wages up to $7,000 per employee. A variable credit that reduces the rate may apply


Social Security totalization agreements

► Social security totalization agreements eliminate dual social tax when a worker is required to pay such tax on the same earnings in more than one country

► These agreements also fill gaps in benefit protection when workers have divided their careers between the US and another country

► The exemption under a totalization agreement applies for a limited period, generally, 5 years

► Employees must present a certificate of coverage from the foreign country to qualify for exemption from US Social Security and Medicare tax under the agreement

Click here for more information

Countries with Social Security totalization agreements with the US

Australia Germany Poland

Austria Greece Portugal

Belgium Hungary New in 2016 Slovak Republic

Canada Ireland South Korea

Chile Italy Spain

CzechRepublic

Japan Sweden

Denmark Luxembourg Switzerland

Finland Netherlands United Kingdom

France Norway


Federal Income tax withholding Nonresident aliens in the US*

1 Temporaryemployment exclusion?

2 US permanent establishment (PE)?

3 Treaty eligible?

► All wages earned in the US are subject to federal income tax withholding unless: ► The employee is present in the US

for a period of 90 days or less for the taxable year, and

► Compensation in the aggregate for the taxable year is $3,000 or less

► Services are provided for a foreign employer that has no US permanent establishment

► Example: Business visitorsattending a meeting in the US for the benefit of the foreign employer [IRC §861(a)(3)]

► While the US maintains treaties with a number of countries to prevent dual taxation, those treaties will generally stipulate that they do not apply if the employer has a permanent establishment (PE) in the US.

► PE generally exists under a treaty if: ► Number of days in the US for the tax

year is exceeded (e.g., for Canada treaty, 183 days)

► There is a fixed US location from where work is performed

► The nature of the employee’s activities in the US triggers a PE

► If the employer/employee qualify for a treaty exemption, federal income tax is not required if: ► The employee completes,

signs and gives the employer a Form 8233 with a US taxpayer identification number

► Wages exempt under the treaty are reported on Form 1042, 1042-S, 1042-T

► Nonresident alien is required to file Form 1040NR if US sourced income equals or exceeds one personal exemption ($4,000 in 2015)

* US resident (rather than nonresident) status applies to green card holders and those meeting the physical presence test


US income tax treaties

► Armenia► Australia► Austria► Azerbaijan► Bangladesh► Barbados► Belarus► Belgium► Bulgaria► Canada► China► Cyprus► Czech Republic► Denmark► Egypt► Estonia► Finland► France► Georgia► Germany

► Greece► Hungary► Iceland► India► Indonesia► Ireland► Israel► Italy► Jamaica► Japan► Kazakhstan► Korea► Kyrgyzstan► Latvia► Lithuania► Luxembourg► Malta► Mexico► Moldova► Morocco

► Netherlands► New Zealand► Norway► Pakistan► Philippines► Poland► Portugal► Romania► Russia► Slovak Republic► Slovenia► South Africa► Spain► Sri Lanka► Sweden► Switzerland► Tajikistan► Thailand► Trinidad► Tunisia

► Turkey► Turkmenistan► Ukraine► USSR► United Kingdom► Uzbekistan► Venezuela► Vietnam (Pending)

US income treaties are available here.


Canada resident in the US as nonresident Case study (coordination of federal and state rules)

A Canada widget distributor has one employee who travels to the US for tradeshows, annual client reviews and to pursue new business. Under the physical presence test, he is a US nonresident. There is no fixed US place of business. All sales are finalized in Canada but there is indication that key terms of US contracts may be negotiated while the Canada employee is in the US. Result: It is questionable if the company can take a positon under the US-Canada income tax treaty that there is no US permanent establishment (PE) since contracts are negotiated in US.

Work location Days Day Rate Annual FICA FUTA State incometax withholding

US 65 $485 $31,525 No (Totalization agreement)

Yes (Exceedsday and $ threshold)

Yes(Treaty is N/A due to US PE)

California(CA)*

12 $485 $5,820 N/A N/A Yes(Exceeds CA $ threshold)

New York(NY)*

16 $485 $7,760 N/A N/A Yes(Exceeds NY 14 day threshold)

Florida (FL) 37 $485 $17,945 N/A N/A No income tax

*California does not follow the federal tax treaty provision but New York does; however, the federal treaty in this case is not applicable because there is a US PE. If there were no US PE, there would be no NY income tax withholding.


US employee outbound considerations

► The worldwide wages paid by a US employer to US employees who are US citizens and US residents is generally subject to federal income tax withholding, Social Security/Medicare and federal unemployment insurance

► An exemption from federal income tax withholding applies:► Only if the employee completes, signs and

returns Form 673 to the employer, and then:► On the portion of wages exempt under IRC

§911 (foreign earned income and housing exclusions)

► For US citizens only (and not residents), on the portion of wages subject to income tax withholding in the foreign country [IRC Code §3401(a)(8)(A)(i)]


US nonresident alien employee tax onboarding (State income and unemployment tax rules vary)

Form I-9 indicates US nonresident alien status?

FIT/FITW

FICA

Yes

Form 8233 required for exempt wages

Form W-4 subject to special rules

Form 1042-S to report exempt wages

Show “NRA” on Form W-4, Line 6

Cannot claim exempt

Status is single and not > than 1 allowance *

Certificate of coverage required

Exempt from FICA

Show exempt wages on Form 941

Exempt from FICA and FUTA

Applies to F1, J1, M1, Q1, or Q2 visas

Show exempt wages on Form 940/941

Treaty exemption

Form W-4 special rules

Totalization agreement applies

Exempt under US visa

* This requirement does not apply to nonresidents of Canada, Mexico, South Korea or student business apprentices from India


►Latest developments


Mobile workforce income tax Recent developments to note

Connecticut (Act No. 15-1) Effective January 1, 2016, the compensation of Connecticut nonresident employees is exempt from state income tax and income tax withholding if employees are present in the state for 15 or fewer days in the calendar year.

Ohio (Sub. H.B. 5) Effective in 2016, the de minimis threshold for nonresident local income tax withholding is increased from 12 to 20 days. The provision applies only to employers that have offices or operations within Ohio.

Indiana (Public Law 243) Effective in 2017, the three local income tax rates (COIT, CAGIT, CEDIT) are consolidated into one, while increasing the tax that nonresidents pay.

Close call on New Jersey-Pennsylvania reciprocal agreement New Jersey Governor Christie sent notice to Pennsylvania that its reciprocal agreement with Pennsylvania would terminate after December 31, 2016. New Jersey lawmakers came forward with legislation to cure the deficit, reinstating the agreement.


Mobile workforce income tax Federal proposed legislation

Mobile Workforce State Income Tax Simplification Act of 2017 (Press release)► First introduced in 2009 ► Passed House in 2015, but not the Senate► Currently opposed by the Federation of Tax

Administrators and the National Governors Association

► Also opposed by states that benefit the most from nonresident income tax revenues

► Currently supported by the American Institute of Certified Public Accountants and the American Payroll Association

► Notably, the proposed legislation would prohibit a state from imposing an income tax on nonresident individuals who work within the nonresident state for 30 or fewer days ► The bill does not address the tax treatment of

equity or other trailing compensation


►Payroll tax audits


Payroll tax recordsWhat is vital to a tax audit?

Compensation detail ► System taxability

configurations for earnings and deduction codes

► Annual accumulators for pay and deduction codes

► Plan documents ► Benefit enrollment data ► Employee vesting history

including work/resident locations

► Insurance contracts (health, life, disability)

► Wage/benefit apportionment calculations

► Gross to net detail by payroll period

Withholding tables and publications ► Tax tables or

computer formulas► Governmental

guidelines for withholding due dates, taxability, nonresident employment, etc.

Returns/information statements ► Forms W-2/Forms 1099-MISC ► Withholding tax returns ► Unemployment insurance returns► Proof of timely payment and filing

Employee resident location data ► Federal Form W-4 ► Human resources records (pay stub,

benefits notices)► Driver’s license where needed

Employee withholding allowance certificates ► All employee revisions► Forms required to claim exemption► Forms required for reciprocal agreements

Employee work location data ► Timesheets ► Expense reports ► GPS tracking data ► List of all office

locations and other job sites including address; magnetic swipe or security card system records

► Headcount reports by work location

► Board minutes ► Service contracts

1

2

6

5

34

Records must be available at minimum for the

applicable statute of limitations


Income tax withholding recordsThree important points to consider

Routinely download third-party service provider reports, records and returns Be certain that reports and records created by third-party service providers are downloaded routinely to your employer’s secure server. Keep a well-labeled inventory of the records you store and confirm each reporting period that the data is complete and has integrity.

Secure and store all necessary governmental publications Even if tax calculations are performed by a trusted third party, obtain from all taxing jurisdictions any publications or similar materials used to support tax calculations, returns filing, etc. In some cases these materials are updated, and tax records should contain all revisions for the statute of limitations.

Capture all necessary historical electronic data For instance, where employee self-service systems are used to gather employee withholding allowance information, capture all historical data used to calculate taxes for the payroll period. Similarly, historical information concerning employee work and resident locations is necessary.


New York withholding audit Audit defense life cycle

Risk assessment Field audit Settlement Post-audit

• Review company policy and procedures

• Identify information sources; confirm completeness of data

• Understand and document data anomalies

• Provide summary of findings

• Prepare responsive materials to the IDR, including preparation of electronic data files; gap mitigation; footnote exceptions; and document assessments that should not apply

• Participate in meetings with agency representatives

• Seek executive waivers• Review penalty assessment

accuracy• Discuss audit terms with

agency representatives • Review the final audit

assessment • Complete audit closing steps,

including preparation of amended employer returns

• Prepare and deliver employee communications and assist with tax return preparation

• Develop steps for, and assist with, ongoing monitoring

Information document request

12 to 18 months 6 to 12 weeks 6 to 12 weeks4 to 6 weeks

• Identify policy changes and revisions

• Review and document updates to procedures

• Prepare process statement for ongoing executive governance

• Perform a regular compliance review

• Conduct annual review of tax and reporting setups for earnings and deduction codes


MergersProvide a description of any mergers, acquisitions and/or sales of any affiliated entities.

1Work travelDescribe the system of tracking the travel of highly compensated employees based outside of New York.

2Work locationProvide any magnetic swipe or security card system records for New York locations.

3AllowancesDescribe the process for collecting withholding certificates from employees (e.g., Form W-4, the NYS Form IT-2104).

NonresidentsProvide a list of corporate apartments or houses located in New York.

54New York withholding auditSample information document request (IDR) items


New York withholding auditSelect audit samples

Nonresident review Telecommuters

► All employees with no nexus to New York state/city at the end of the year with federal wages greater than $20,000 and New York state wages greater than $0.

► All employees with a New York work state code or New York physical work location code but no New York state address (i.e., employees who work in New York but do not live in New York).

No reported wages

► All employees with no nexus to New York state, no New York state wages, and no New York state income tax withholding.

Telecommuters US outbound

► All employees with no nexus to New York state who have an indicator that they telecommute.

► All employees who typically are US citizens and who are working in another country per the employer’s records.

Resident income tax

► All employees with a New York state/city ZIP code, New York state address or New York resident state code and zero New York state/city income tax withholding.


New York withholding auditSelect audit samples (continued)

Worker classification NYC withholding

► All employees with a New York work state code, work location code, or address who received both a Form 1099-MISC and a FormW-2 in the same year.

► Employees with New York City withholding greater than zero, a New York City ZIP code and New York City withholding of less than 2% of taxable federal wages.

Incorrect withholding

► Employees with New York income tax withholding greater than zero and have a New York work state code, resident state code, physical work location code, or address and have little income tax withheld.

Worker classification Reconciliation

► All employees with a Social Security Number that matches a Social Security Number included in the New York state wage reporting database in at least one of the prior five years.

► Wages reported to New York per Forms W-2 does not agree to federal Form 940 or 941 (taking into account wages paid in other states).

No withholding

► All employees with a New York state/city ZIP code, New York state address or New York resident state code and zero New York state/city income tax withholding.


IRS international audit focus Two fronts now used in cross-border business visitor review

Employment Tax Group ► IRS focuses on payments from US, withholding, Section

911, and inclusion in Form W-2

► Question low or no withholding where wages reported in box 1

► Question no FICA withholding

► Look for Social Security certificates of coverage

► Review Social Security coverage

► Stock options and FITW, FICA

► IRS agents look for stock options to foreign persons and question whether FICA or FITW would apply

► Inbound short-term business visitor

► Some employers tell IRS that the business visitor is employed by the foreign entity and that the US entity is not the employer.

- Could backfire if IRS raises service Permanent Establishment (PE) issue for foreign employer

- IRS has indicated it will open audits of foreign entities sending workers to the US (we are not aware of any audits yet)

Foreign Payment Practice Unit

► IRS inquiries about inbound short-term business visitor

► Inquiries not focused on FICA, instead the IRS confirms FITW at 30%; Form 1042-S or Form W-2 reporting and use of graduated rates

► IRS focuses on payments from US, withholding, Section 911, inclusion in Form W-2

► Some comments have been made about referring cases to the Employment Tax Group for FICA analysis


Withholding tax audits are increasingIn the US and across the world

SEDE

US

MX

BR

ZA

NE

GB

FRES

LT RU

CNJP

IN

IDMY

PH

AU

NZ

CA

TRCH

IT

High risk Mediumhigh risk

Mediumrisk

Lowerrisk


Global traveler risk landscapeAudits are up in US and worldwide

The bottom lineTax authorities globally are focused on business travelers crossing borders

Substantial assessments, fines and penalties are coming out of audits

International business travelers are being stopped and questioned at immigration checkpoints

Employees are being turned back at borders impacting business continuity in those countries

If you don’t have a permanent establishment in the US, or a US bank account, how will you perform shadow payroll operations for the US?

Instances of tax and immigration non-compliance are front page news – can your company live with the reputational risk?

Consider how the new focus on US border security will further complicate compliance.


►Audit flags, risk assessment and mediation


The risk of noncomplianceMeasure the risk, not the chances of getting caught

Withholding tax liability

Penalties, interest

and criminal charges

Officer personal liability

Employee audits,

assessments and employee

morale

Loss of business license

Loss of reputation

Increasing consequences

Public companies must report any known contingent liability on their financial statements (FAS 5)


1 The state(s) where employees perform services is actively engaged in withholding tax audits.

2Vehicles or equipment that prominently display the company’s name and/or logo are frequently present in the jurisdiction.

3 Officers and highly paid employees frequently perform services in a particular state, and/or their presence in the state is easily documented or otherwise well-known. For example, public records reflect an upcoming acquisition, purchase or stockholder meeting.

4 Sales and use taxes are paid to the state but not income tax withholding.

5 Wages are reported on Form W-2 to the state, but no local wages are reported.

6 Expense reports show reimbursement for travel to other states and localities.

7 Accounts payable records show travel, relocation or other “out-of-state” related costs paid on behalf of employees.

8 A parent operates a subsidiary in one or more states other than the state of the parent company.

9 The company holds a corporate lease or otherwise owns property in the jurisdiction for use by its employees.

10 Employees own or lease residential property, hold driver’s licenses or are registered to vote in a state other than the resident state shown on the Form W-2 or Form W-4.

11 Unemployment insurance is paid to the state but not income tax withholding.

12 Wage and tax adjustments were filed with one taxing jurisdiction and not another. Keep in mind that the IRS has an agreement with a number of states to share tax audit findings.

13 Accounting records reflect a tax reserve for contingent liabilities connected with underreported wages and related income taxes.

14 The company is under contract with the state or municipality to provide goods or services.

15 Independent contractors are substantially used in a state, irrespective of whether the company is deemed to be doing business in that jurisdiction.

Top15 income tax withholding audit flags

Income tax withholding audit flagsWhat tax auditors may watch for

US cross border considerations: Focus on multistate income tax

The accurate tracking and reporting ofbusiness travelers’ wages and taxesposes many challenges foremployers, including:► Accumulating accurate travel data► Making sure it is current – accurate

data that is too old is dangerous ifa threshold has already beenexceeded

► Maintaining up-to-date knowledgeof all relevant jurisdictions,particularly newly visited orinfrequently visited locations

► Understanding the differencebetween the letter of the law andestablishing practice in somelocations

► Managing the data such that risksand consequences ofnoncompliance are minimized

Usually an organization owned process

Inputs from travel suppliers,building security, electronic diaries

STBTs

1Data capture

2Trackingdata

Storing,maintainingandupdating data

Calendaringtools

3Analysis - Applyingrelevant technical rules

4Flag andcomplianceaction

Triggerand paywithholdingtaxes

Year-endreporting

Tax returnpreparationand filing

Certificatesof coverageand treatyexemptionforms

Social security ImmigrationTax

In-house expertise oroutsourced to service providerin part or whole.

Easilydeployable ITkey to success

Short-term business travelersData gathering and processing considerations

US cross border considerations: Focus on multistate income tax

Some company policy considerations

Governanceroles and steps

WorkdayDefinition

Coveredemployees

Compliantstates and

locales

Locationtracking

method(s)

Tax equalization(gross up)

Immigration

Travel expensereimbursement

Telecommuters

Trailingcompensation

Employee taxreturn

preparation

Withholdingand true upfrequency

Who owns thisprocess?


Payroll withholding audits Risk assessment and mitigation steps

Prioritize► Monetary risk► Reputational risk

Identify► Work and resident

locations

Mitigate► Amnesty program► Voluntary disclosure

Research► Requirements► Sanctions

1

2

3

4Comply


Remediation considerations Prioritizing jurisdictions and their timing

Factors to consider when prioritizing remediation► Amnesty or voluntary disclosure

opportunities► Business risk within a jurisdiction► Audit risk and potential criminal, civil or

administrative penalties► Potential for reputational risk► Extent of revenue authority information

sharing► Relationships with the jurisdiction

(government contracts, etc.) ► Statute of limitations, including where

returns have not been filed (and, consequently, the statute won’t expire)


Remediation considerations Resolving compliance issues with taxing authorities

Remediation strategy► Settle at the corporate (rather than

employee) level► Make one off payments to revenue

authorities► Minimize penalties and interest charges► Consider reasonable cause where

applicable ► Conduct self audits ► Gather historical jurisdictional data such

as tax and interest rates


Are you on board?

Are you perpetually tracking employee movement and meeting the related wage tax liabilities across national, state and local borders?

If your mobility workforce tax processes are not optimal, have you quantified the risks?

For employees routinely living and working in different jurisdictions, do you have a system for apportioning wages and timely withholding taxes?

Is your mobile workforce tax policy adequately addressing your compliance and governance requirements?

Are employees familiar with your mobile workforce tax policy and do you provide them with resources to address their questions and concerns?

When employees receive compensation for services provided in prior years, do you consider states/cities of employment during the period earned?

Who are your business partners? How are they integrated? Are you performing an end-to-end review?


Take a one-minute risk assessment O

verall compliance

1 – High risk2 – Medium high risk3 – Medium risk4 – Low or no risk

Rank your performance overall and in each of these five phases of mobile workforce income tax compliance


►Benchmarking compliance


2015 Ernst & Young LLP and Bloomberg BNA Multistate Payroll Compliance Survey

Risk More than 500 respondents identified areas of risk.

Trailing compensation Many respondents have challenges sourcing equity compensation and similar earnings to the correct states.

Audits are on the rise Many respondents have been subject to governmental withholding tax audits.

Other trends and factsResults tell us other trends about company policies and resources relied on for compliance.

Work location tracking Many respondents say they rely on employees to self report their work locations.

Compliance Most respondents indicated they do not comply with all requirements.

Six key findings


2015 Multistate Payroll Compliance SurveyTune in to our June webcast for 2016 findings

The report contains 48 pages of polling results and analysis to assist you in benchmarking your policies and procedures with other employers of your size and industry.

Click on the report covers to download.

Download your copy of the 2015 Multistate Payroll Tax Compliance Report

Tune in to our June webcast for the 2016survey results

► Leave your business card to be included our webcast invitation list

► Earn 1.5 RCH credits by participating in the webcast

► At the close of the webcast, participate in the 2017 survey and of the first to see the complete report


Ernst & Young LLP

Putting informintoInformation

Stay connected Like our payroll year-end page on Facebook Tour the EY payroll year-end checklist Learn about multistate payroll tax at EY get on board Follow EY on Twitter @EYEmploymentTaxVisit EY on LinkedIn @Payroll Perspectives from EY

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