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State Tax Challenges of a Mobile Workforce
Posted in Tax and Finance
State Tax Challenges of a Mobile Workforce

With the exception of a snow day or two, most of us venture outside the comfort of our homes for work each day. But for a growing number of Americans, home isn’t just where the heart is: it’s where the office is, too. The United States Census Bureau reports that 13.4 million people worked from home at least one day per week in 2010—a 35 percent increase from 1997. As improvements in internet and communication technology have become commonplace, employers that hire remote workers now run the gamut from traditional corporate employers to computer, engineering, and science companies.

Although many workers may now find themselves at a home office instead of a cubicle, there continues to be a necessity for certain employees to travel frequently as part of their job description. Top executives for multistate businesses in particular may be expected to maintain offices or spend extended amounts of time in several different locales. Employing home-based workers can be a great opportunity for employers who wish to cut overhead or retain talented employees who want to work somewhere other than “the office.” And, having employees who can put in face time at offices in multiple states can be of great importance to a company. However, employers should recognize that they may be trading convenience in one area for a headache in another: taxes.

State Audits Related to Non-Resident Employees on the Rise

After the economic downturn in 2008, states have experienced a decrease in revenue and budget shortfalls and consequently have sought ways to make up the difference. Auditing areas of perceived noncompliance is one way to increase revenue while avoiding the political hassle of passing a new tax. Furthermore, attempting to collect tax from nonresidents who do not vote in the state where they work is another political boon for states. Predictably, states with large cities near the state border tend to be more aggressive in auditing companies who they suspect may have employees working in their state.

The New York Department of Taxation and Finance knows that thousands of people ride the train from Connecticut to work in New York City each morning, and the department will want to be sure it is collecting the appropriate amount of tax from those individuals. And most of us Louisvillians know at least one person who commutes from Southern Indiana to work in Kentucky. State tax departments are aware of the increase in both travel and home-based employees, and the higher scrutiny should lead employers to be cautious when evaluating withholding and filing requirements.

Where is a Business Subject to Withholding?

Most states that impose an income tax like Kentucky, impose the tax on all income earned by residents and income earned by nonresidents from in-state sources. In other words, a Kentucky resident is subject to income tax on income earned anywhere, while a non-resident would be subject to income tax in Kentucky only on the income he or she earned in Kentucky.

In order to help ensure individuals pay their income taxes, states impose withholding requirements on employers. KRS 141.310 requires an employer in Kentucky to withhold Kentucky income tax for both resident and nonresident employees unless otherwise exempt. Under KRS 141.340, employers who fail to withhold the proper amount of income tax may be subject to a penalty. Liability for the penalty can extend to the responsible officers of the company.

If the company is Kentucky-based and employs only Kentucky residents, withholding issues are relatively simple. But what if a Kentucky-based employer has a home-based employee in another state? At that point, the company needs to review the withholding laws for the state in which the employee is a resident, which can vary significantly.

For example, New Jersey imposes withholding requirements on any “employer maintaining an office or transacting business within th[e] state and making payment of any wages subject to New Jersey personal income tax.” Although an employer may only have an office in Kentucky, by employing a person who lives and works in New Jersey, that company could be considered to be subject to New Jersey tax withholding because it now transacts business in the state, as long as business nexus with the state has been achieved. The company could be required to withhold both Kentucky and New Jersey personal income tax from the home-based employee.

Reciprocal Agreements

All of this withholding can get, well, taxing. Luckily, in recognition of an increasingly mobile workforce, many states have entered into reciprocal agreements with other states when it comes to tax withholding. States who have reached a reciprocal agreement with one another are forbidden from taxing earned income (usually wages, salaries and commissions) by employees who live in the other state. Kentucky has entered into some form of reciprocal agreement with Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia and Wisconsin. In other words, if a Kentucky company employees a resident of Indiana, Kentucky is precluded from taxing the salaries, wages, and commissions earned by the Indiana resident in Kentucky. Many states have reciprocal agreements, but others have elected to go it alone and pass no reciprocity with other states. New York, Connecticut and New Jersey are examples of these states.

De Minimis

When dealing with a full-time home-based employee who resides in a different state from the employer, it can be easy to track where the employer should do tax withholding. But what about employees who live in the same state as the employer but travel for work? If an employee goes to a sales conference in another state, does that trigger withholding? Maybe. Again, the standard for when withholding is required varies from state to state.

Some states consider certain levels of activity in the state to be de minimis and will not require withholding until a certain threshold is reached. Some states go by the number of days worked in the state; for others, once a certain threshold of dollars earned in the state is reached, withholding is required. In Arizona, if an employee has worked in the state for 60 days in a year, the employer is required to do withholding. Wisconsin requires withholding once an individual earns $1,500 in wages in the state.

The majority of states, however, have no de minimis threshold and consider withholding to be triggered on the first day an employee earns even $1 in the state. As long as the employer has business nexus with the state, it could be required to withhold on employees who travel even for short periods into that state. Kentucky’s withholding regulation, 103 KAR 18:010, requires withholding from “[e] very employer incorporated in Kentucky, qualified to do business in Kentucky, doing business in Kentucky, or subject to the jurisdiction of Kentucky in any manner, and making payment of wages subject to withholding.”

This area can be a particular concern for top executives who travel frequently and have high visibility in national news markets. State tax departments can easily catch wind of CEOs who have traveled to a particular state for a conference and begin to dig deeper into those executives’ connections to the state. The same is often the case with high profile mergers and acquisitions; a state tax department will assume that meetings—and business—have been conducted across state lines during the negotiations for these deals. And those states may consider withholding to have been triggered.

What Can a Company do to Ensure Compliance?

A huge part of ensuring compliance with various state tax withholding requirements is good communication between the relevant actors at the company. There must be a process by which human resources can work with the tax, accounting or payroll department to determine where employees work or travel. In some cases, it may be necessary for the company to develop a policy by which the employees track interstate travel to evaluate whether state withholding thresholds have been triggered.

Companies may be rightfully concerned about registering with multiple state tax departments, but they should also take into consideration that the company could be stuck with withholding tax and penalties for employees no longer with the company. Therefore, communication with employees is vital, and a company may wish to advise them to seek their own tax advice. Because these issues can be incredibly fact-specific, it’s always wise for the company and the employee to consult a tax attorney before making an ultimate decision when it comes to where to live, work or employ. Home is where the heart is, but it’s often where the taxes are, too.


Bailey Roese is an attorney with Bingham Greenebaum Doll LLP Greenebaum Doll. She is also chair of the LBA’s Taxation Section and a member of its Young Lawyers Section. To learn more about Bailey Roese and her practice, please visit her profile.

Reprinted with permission from the March 2016 edition of Bar Briefs – a monthly publication of the Louisville Bar Association.

  • Associate

    Bailey represents taxpayers in federal, state, and local tax controversies as a member of the Firm’s Tax & Employee Benefits practice group. Bailey regularly advocates for clients in the state courts and administrative ...

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