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Mobile Workforce Legislation – A Federal Fix Needed for a State Tax Problem

June 02, 2015

For employees who work outside of their home on a temporary basis; there are almost as many different sets of rules and requirements as there are states.

25 taxes for 25 players is how Red Sox teams of old were often described. Well the same goes for state taxation of employees who work outside of their home on a temporary basis; there are almost as many different sets of rules and requirements as there are states. These rules apply not only to the taxation of the individual who is working outside his or her home state, but to the employer’s obligation to withhold income taxes in these nonresident states. Employers can especially have large tax exposures from failure to comply with these complex requirements.

A state generally can tax a nonresident on income earned within the state. For an employee this would be determined by the number of days physically present for work in each state. There are exceptions to this rule, but of course the exceptions vary widely between the states. Some states have a threshold of days worked in the state before a nonresident is subject to tax. Furthermore, days spent in a state which are only incidental to the employee’s primary job, such as days at a training seminar, may not count as a day worked in that state. But a consultant, accountant, lawyer or other service provider who travels to a client’s location outside their state of residence to provide a service is clearly at risk for nonresident taxes in the states where they are working.

Further compounding the problem is the withholding obligation placed on employers when they send employees to work in states outside their home state. These requirements are often different than the nonresident income tax filing requirements. For example, New York can tax a nonresident for working a single day in New York, yet employers are not required to withhold New York tax from an employee who works less than 12 days in the state during the year. From an audit perspective, employers have greater risk than their employees as the state can collect more taxes from a single employer who failed to withhold from many employees than from having to identify and audit each individual who failed to file nonresident tax returns.

In recognition of this unworkable situation, the Mobile Workforce State Income Tax Simplification Act of 2015 has recently been introduced in both the U.S. House and Senate. The legislation would establish a 30 day threshold that all states would be required to follow. Nonresident employees who work less than 30 days during the year in a state would not be subject to tax. Only when their work days in the state exceed 30 would their wages be subject to tax and the employer required to withhold.

Prospects for passage of this legislation are unclear at best. An identical bill was passed by the House in 2012 but never acted on in the Senate. High tax states such as New York and California have opposed the legislation which would potentially result in a revenue loss in these states. New York in particular has developed audit programs to aggressively identify nonresident individuals who have worked in New York on a temporary basis and not filed a tax return.

The State and Local Tax Group at KLR are closely watching the developments in Congress concerning this proposed legislation. If your business has employees that work outside their home state on a regular basis, contact us.

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