2016 Multistate Payroll Tax Compliance Report

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Barbra Parsons
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1 2016 Multistate Payroll Tax Compliance Report

3 Table of Contents List of Figures... 4 Acknowledgements... 6 About the Author... 6 Introduction... 7 Study Design, Methodology and Presentation... 7 Definitions of Industry Sectors... 7 Use of E-Verify... 9 Chapter 1 Temporary, Permanent Multistate Employment. 11 Timely Notification of Location Changes State and Local Auditing The Problem of Trailing Compensation Tracking Employees Across State Lines Courtesy Withholding, Assistance Following State Guidelines W-2 Issues Staying Abreast of Changes Chapter 2 Foreign, Nonresident Workers Tracking Mobility Tax Assistance Appendix Survey Result Tables COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 3

4 List of Figures Introduction Figure 1 Profile of Participating Employers... 8 Figure 2 Use of E-Verify... 9 Chapter 1 Temporary, Permanent Multistate Employment Figure 3 Employers Receiving Timely Information on Changes to Domestic Residency Figure 4 Subject to State or Local Audits Figure 5 Top States by Percentage of Employers Who Have Been Subject of a State Income Tax Audit Figure 6 Top States by Percentage of Employers Who Have Been Subject of a State Unemployment Insurance Audit Figure 7 Top States by Percentage of Employers Who Have Been Subject of a Local Tax Audit Figure 8 Source Compensation to the State Earned When Determining Imcome Tax Withholding on Equity Compensation, Bonuses and Other Trailing Compensation Figure 9 Program for Withholding Nonresident State Income Taxes Figure 10 Employee Groups Included in Program for Withholding Nonresident State Income Taxes Figure 11 Pay State Nonresident Income Tax for Short-Term Assignments for U.S. Domestic Employees (Gross Up) Figure 12 How Often Organization Withholds and Deposits Nonresident State Income Tax Figure 13 Proportion of Corrected Forms W-2 That Concern Multistate Employment Chapter 2 Foreign, Nonresident Workers Figure 14 Employ Foreign, Nonresident Workers in U.S COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

6 ACKNOWLEDGEMENTS We wish to extend our thanks to the many payroll executives and professionals who participated in the 2016 Multistate Payroll Tax Compliance Survey by Bloomberg BNA and Ernst & Young LLP. This report would not have been possible without their willingness to complete the comprehensive survey questionnaire, despite their considerable professional duties and obligations. We are very grateful for their participation. We also would like to thank Debera Salam, CPP, who serves as director of Payroll Information Management Services for Ernst & Young s Workforce Advisory Services Group. Debera was the primary champion of this collaborative effort with Bloomberg BNA, and she provided invaluable assistance during the research and questionnaire design phases of the project, as well as perspective on the report s content and analysis. Naomi Hall of Bloomberg BNA was instrumental in setting up the survey tool, collecting the data and, with the BBNA graphics team, developing the tabular results from the more than 400 responses. We also are indebted to Fonda Jarrett for her work on the design and layout of this report. About the Author Bloomberg BNA s Caitlin Reilly is the primary author of this report. Caitlin covers state income tax withholding and other payroll issues for Bloomberg BNA s Payroll Library and Payroll Decision Support Network. The following individuals contributed to the study design, data collection, analysis, writing, copyediting and production of this report: Michael Baer, Managing Editor Naomi Hall, Survey Research Analyst 6 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

7 INTRODUCTION Tracking employee movement across state and country boundaries presents many challenges to payroll departments and can open employers up to compliance risks. The 2016 Multistate Payroll Tax Compliance Survey by Bloomberg BNA and Ernst & Young LLP sought to identify the most common payroll practices and areas of risk so that organizations can maintain better state tax compliance for their mobile, domestic employee population as well as foreign, nonresident employees working temporarily within the U.S. This report also may be useful for benchmarking process and policy as it pertains to mobile workforce payroll tax compliance. This report on the survey s results is representative of several areas of employer interest, such as risk sensitivity, experience with state income tax withholding audits, methods used for securing work location data and frequency for withholding and paying nonresident income taxes. In addition, data by industry and by employee size are included. This final report also includes an appendix listing the questions and the response results. Study Design, Methodology and Presentation Bloomberg BNA s and Ernst & Young LLP s 2016 Multistate Payroll Tax Compliance Preliminary Survey Report was based on an extensive survey conducted among payroll professionals and executives from July 26, 2016, to Aug. 21, The survey was conducted online, with several reminders to respond. As an incentive to participate, respondents received a complimentary electronic copy of the full survey report. A total of 429 organizations provided usable data for analysis. Several steps were taken to ensure participants confidentiality. The survey was hosted on a secure website to ensure that information submitted by respondents could not be observed or obtained by third parties. Respondents were assured that neither individual respondents nor the organizations they represented would be identified without express permission from the participants. Apart from those exceptions, only aggregate data and statistics are presented and analyzed in this report. Definitions of Industry Sectors The participants of the survey were asked to state their employer s major industry sector, which, for purposes of the survey, were: manufacturing, nonmanufacturing and nonbusiness. The manufacturing sector includes basic goods manufacturing (such as agriculture, chemicals, lumber, primary metals, mining, paper and petroleum), intermediate goods manufacturing (such as food, furniture, fabricated metals, rubber and COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 7

8 plastic) and advanced goods manufacturing (such as aerospace and defense, automotive, computer and electronic products, machinery as well as medical and health care products). The nonmanufacturing sector includes organizations in industries such as construction, transportation, warehousing, utilities, wholesale and retail trade, finance, insurance, real estate, consulting, communications, publishing, information services, telecommunications as well as business, personal and miscellaneous services. Nonbusiness operations include government entities, membership organizations and associations, health care facilities, educational institutions and social service organizations. In addition, respondents selected whether they were large employers (with 1,000 or more employees) or small employers with fewer than 1,000 employees. The responding payroll professionals represented a wide variety of enterprises, institutions and industries, as Figure 1 shows below. Of the 429 employers that provided data for analysis in this report, 63 percent were nonmanufacturers, 19 percent were manufacturers and 17 percent were nonbusiness organizations. (See Figure 1.) Figure 1 Profile of Participating Employers Industry Number of employees working within the U.S. (both resident and nonresident) Number of U.S. citizens and U.S. residents working outside the U.S. Number of states where employees temporarily or permanently work Number of states where company is registered for income tax withholding Manufacturing Nonmanufacturing Nonbusiness Small (Fewer than 1,000) Large (1,000 or more) None 1 to 999 1,000 or more 1 to to 50 1 to to % 63% 17% 28% 72% 45% 44% 10% 42% 58% 44% 56% Source: Bloomberg BNA Note: Percentages may not add to 100 due to rounding. Seventy-two percent of participating organizations had at least 1,000 employees working within the U.S., and 28 percent had fewer than 1,000 employees working within the U.S. Forty-two percent of organizations employees worked temporarily or permanently in one to 25 states, and 58 percent of organizations reported that their 8 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

9 INTRODUCTION staff worked temporarily or permanently in 26 or more states. Forty-four percent of responding organizations were registered for income tax withholding in one to 25 states, and 56 percent were registered in at least 26 states. Fifty-four percent of responding organizations employed at least one U.S. citizen or resident who works outside of the U.S., while 45 percent of establishments reported no U.S. citizens or residents who worked abroad. Use of E-Verify In addition to focusing on employment tax compliance for out-of-state workers, the survey asked employers about their use of E-Verify, an internet-based system operated jointly by the Social Security Administration and the Department of Homeland Security s U.S. Citizenship and Immigration Services. The system permits participating employers to electronically verify almost instantaneously the employment eligibility of new hires through the SSA and service s databases. Nationwide, employer participation in the E-Verify program is generally voluntary, but once in, employers must verify all new hires, regardless of national origin or citizenship status. Certain federal contractors and subcontractors are required to use the system, and some states now mandate employer participation in E-Verify. (See Figure 2.) Sixty-four percent of employers surveyed used E-Verify for all employees and 23 percent said they did not use the program at all. Eight percent used E-Verify for employees only in certain states, and 5 percent used it for certain groups of employees regardless of their location. Figure 2 Use of E-Verify We use it for all employees 64% We use it for employees in certain states 8% We use it for certain groups of employees, regardless of their state location 5% We do not use E-Verify 23% Source: Bloomberg BNA Of responding employers with at least 1,000 employees, 69 percent said they use E-Verify for all employees while only 51 percent of smaller employers reported COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 9

10 using E-Verify for all workers. There were no notable differences in the use of E-Verify for all workers by industry. Please see Appendix, Section A, Question 6, for full demographic breakdowns. Ernst & Young LLP Observation: President-elect Donald Trump indicated during his presidential campaign that he favors mandatory participation in e-verify. In anticipation of this likelihood, employers not currently using e-verify should consider voluntarily adopting it, perhaps starting with smaller work locations. 10 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

11 TEMPORARY, PERMANENT MULTISTATE EMPLOYMENT Tracking employees who cross state and jurisdictional lines for work may result in a host of compliance difficulties for employers. When sending workers on business trips, employers may overlook the requirements of many states to tax the income earned in the state by those nonresident workers. Some states have laws and regulations, and even policies, that guide employers on when a worker traveling to that state must count the income earned for state income tax purposes, and when the requirements to report that income are triggered. On the other hand, many of the states do not directly address this issue in laws and regulations, which often means the letter of the state law requires all earnings from work within the state to be taxed, and the employer is liable for withholding that tax and reporting the earnings. Eight-eight percent of the employers surveyed had employees who work temporarily or permanently, including short-term business travel, outside of their resident state or local jurisdictions. There is no significant difference from industry to industry in the likelihood of employees working temporarily or permanently out of their resident jurisdictions. Eighty-six percent of nonbusiness employers responding to the 2016 survey reported likely having employees working outside of a home jurisdiction, significantly more than was reported in 2015 (67 percent). This variance could be explained by the change in participants from Smaller employers, those with fewer than 1,000 employees, also are less likely to have employees who work temporarily or permanently outside of their resident state or local jurisdiction (77 percent, compared with 92 percent for larger businesses). Timely Notification of Location Changes Overall, fewer than two-thirds of payroll departments that said they had multijurisdictional workers were generally provided with timely notification about changes of domestic work locations and U.S. domestic residences (64 percent in both cases). There were no noticeable differences by organization size, but by industry, only 49 percent of manufacturing entities that had multijurisdictional workers reported they were not provided with timely notification about changes in work locations. Sixty-nine percent of respondents from nonmanufacturing employers said they were provided with timely notification of work location changes and 60 percent of the nonbusiness employers reported that they received timely notices. Sixty-four percent of employers that had multijurisdictional workers timely received information on changes to domestic residency, down from 72 percent last COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 11

12 year. Smaller employers reported receiving timely notification of the residency changes more often than larger employers (70 percent compared with 62 percent). A significantly higher number of large employers reported that they did not receive timely notification of residency changes than in 2015 (38 percent versus 30 percent). (See Figure 3.) Figure 3 Employers Receiving Timely Information on Changes to Domestic Residency 36% No 64% Yes Source: Bloomberg BNA Employers from different industries did not report a significant difference in timely notification of domestic residency changes. Of all employers responding to the survey, 67 percent said they had payroll systems that adequately accommodated income tax withholding for multiple work states in the same payroll period, 26 percent responded that their systems were not adequate and 8 percent said they did not know. When it came to multiple local jurisdictions, those respondents reported that systems were less accommodating but not by much, with 60 percent responding that the systems were adequate, 28 percent responding the systems were inadequate and 12 percent did not know. Employers in manufacturing reported payroll systems adequately accommodated withholding in multiple states less frequently than employers in other sectors (57 percent, compared to 69 percent for nonmanufacturers and 72 percent for nonbusiness employers). There was little variation in answers based on industry or size when it came to withholding for multiple local jurisdictions. Ernst & Young LLP Observation: Given the material risk employers could incur for untimely withholding and deposit of state and local taxes, they should consider process improvements that provide greater assurance of real time accounting for changes in employee work or resident locations. 12 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

13 MULTISTATE EMPLOYMENT State and Local Auditing At the state level, 35 percent of surveyed employers with mobile domestic workers said they had been audited for state income tax withholding, with 19 percent saying they were audited in the past year. Eight percent were audited two to three years ago, 5 percent four to five years ago and 3 percent more than five years ago. Sixty-five percent of respondents said they were not subject to a state nonresident income tax audit. The results were in line with answers to last year s survey. Figure 4 Subject to State or Local Audits Yes, in the last year Yes, 2 to 3 years ago Yes, 4 to 5 years ago Yes, more than 5 years ago No State Income Tax 19% 8% 65% 5% 3% * Local Income Tax 13% 4% 79% 3% 1% * Unemployment Insurance 22% 9% 58% 4% 6% Note: Percentages are based on the number of employers that have employees that work temporarily or permanently (including short-term business travel) outside of their resident state or local jurisdiction. Percentages may not add to 100 due to rounding. Source: Bloomberg BNA *Less than 1% for No response. Employers reported experiencing unemployment insurance audits at slightly higher rates as state income tax audits. Most of the difference in rates seems to have stemmed from the larger percentage of employers that experienced an unemployment insurance audit in the last year. Overall, 41 percent of employers reported being subject to an unemployment insurance audit, with 22 percent saying they were audited in the past year. Nine percent had been audited two to three years ago, 4 percent four to five years ago and 6 percent more than five years ago. Fifty-eight percent of respondents said they had not yet been subject to a state unemployment insurance audit. (See Figure 4.) By industry, nonmanufacturers reported they were subject to state income tax audits of nonresident workers most frequently in the past year (21 percent), while 17 percent of the responding nonbusiness employers and 14 percent of the manufacturing entities reported being subject to such audits. By size, smaller employers were markedly less likely to experience state nonresident income tax examinations than larger companies (10 percent and 22 percent, respectively). The 2016 survey included an opportunity for survey respondents to select states that had audited their employers for employment tax issues. Forty-seven percent COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 13

14 of respondents reported that they were audited for state nonresident income tax issues by New York. California (22 percent) and Pennsylvania (17 percent) were next in the states most likely to have conducted a state income tax audit. In some states, like California, employers across industries experienced state income tax audits at similar rates. However, the data show that employers in other states were more likely to be audited depending on industry. In Colorado, nonbusiness employers reported they were much more likely to be audited for income tax purposes (27 percent) than their counterparts in manufacturing (8 percent) and nonmanufacturing (4 percent). In Illinois, manufacturers reported income tax audits much more frequently than employers in other industries (24 percent, compared to 7 percent for nonbusinesses and 6 percent for nonmanufacturers). Nonmanufacturers responding they had been audited by New York were the most likely sector to report a state audit(52 percent), though reported audits of nonbusinesses (40 percent) and manufacturers (35 percent) also were high. There was little variance in state audits by employer size. (See Figure 5.) Figure 5 Top States by Percentage of Employers Who Have Been Subject of a State Income Tax Audit New York 47% California Pennsylvania New Jersey North Carolina Ohio 22% 17% 14% 14% 14% Source: Bloomberg BNA Similar to the frequency of state income tax audits, large employers were more likely to report experiencing an unemployment insurance audit than small employers (46 percent and 29 percent, respectively). The difference was pronounced in the rates at which large and small employers reported experiencing an audit in the last year (26 percent and 11 percent, respectively). Of those employers that reported experiencing an unemployment insurance audit, California (24 percent), New York (22 percent), Florida and Pennsylvania (both 17 percent) were the states most often cited. Nonbusiness and nonmanufacturing entities had similar audit odds in most states. However, respondents of manufac- 14 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

15 MULTISTATE EMPLOYMENT turing employers were significantly more likely to report being audited than employers in other industries in Pennsylvania (43 percent compared to 13 percent for nonbusiness and 9 percent for nonmanufacturers), Alabama (21 percent compared to 4 percent of nonbusiness and 1 percent of nonmanufacturers), Mississippi (21 percent compared to 4 percent of nonbusiness and 1 percent of nonmanufacturers) and other states. There was no significant difference in the treatment of employer by size in any of the states. (See Figure 6.) Figure 6 Top States by Percentage of Employers Who Have Been the Subject of a State Unemployment Insurance Audit California New York Florida Pennsylvania Texas 24% 22% 17% 17% 15% Source: Bloomberg BNA Ernst & Young LLP Observation: A focus by the US Department of Labor over the last few years on worker misclassification, including incentives for states that audit for noncompliance, likely contributed to an increase in state unemployment insurance audits. At the local level, of those employers that reported having multijurisdictional workers, 21 percent of respondents with mobile domestic workers said they were audited by a local jurisdiction for nonresident tax issues; 13 percent were audited in the past year, 4 percent two to three years ago, 3 percent four to five years ago and 1 percent more than five years ago. Nonmanufacturing businesses and larger companies were more likely than other demographic categories to report experiencing a local income tax audit for nonresidents. Please see the Appendix, Question 14, on page 33 for full demographic breakdowns. Employers most often reported experiencing local income tax audits in Pennsylvania (37 percent), New York (35 percent), Ohio (29 percent) and Delaware (24 percent). For the most part, employers experienced a similar likelihood of audit across size and type of employer, though there were exceptions. Nonbusiness employers were more likely to report local audits than other employers in Colorado (33 percent compared to 8 percent for nonmanufacturers and COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 15

16 7 percent for manufacturers). Nonmanufacturers were more likely report being audited than other employers in localities in New York (41 percent compared to 11 percent for manufacturers and 33 percent for nonbusinesses). Small employers were more likely to report experiencing a local tax audit in California than large employers (25 percent and 3 percent, respectively). (See Figure 7.) Figure 7 Top States by Percentage of Employers Who Have Been the Subject of a Local Tax Audit Pennsylvania New York Ohio Delaware 37% 35% 29% 24% Colorado 11% Source: Bloomberg BNA The Problem of Trailing Compensation Tracking equity compensation and bonuses earned while work was performed in other states, but paid later, and correctly sourcing these amounts presented a challenge to surveyed employers with mobile workers. Forty-one percent of organizations surveyed did not source compensation to the state earned when determining income tax withholding on equity compensation, bonuses and other trailing compensation. (See Figure 8.) More manufacturing employers (52 percent) fail to source equity and bonus compensation than those in nonmanufacturing (38 percent) and nonbusiness (39 percent). The percent of manufacturing employers that reported failing to source trailing compensation significantly increased from 2015 (52 percent from 35 percent). Half of small employers said they failed to appropriately source that compensation (50 percent) while more than a third of the larger employers (39 percent) responded they did not source such compensation. Thirty-nine percent of responding employers with multijurisdictional workers that did not adequately source trailing compensation cited a lack of historical data concerning employees work locations as a reason for not sourcing the compensation to the state earned. Twenty-nine percent said that their organization s policy for doing so had not yet been approved by management, 25 percent said that their third-party provider could not accommodate their needs and 32 percent responded that they were not aware the issue. 16 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

17 MULTISTATE EMPLOYMENT Figure 8 Source Compensation to the State Earned When Determining Income Tax Withholding on Equity Compensation, Bonuses and other Trailing Compensation 41% No 59% Yes Note: Percentages are based on the number of employers that have employees that work temporarily or permanently (including short-term business travel) outside of their resident state or local jurisdiction. Percentages do not add to 100 due to rounding. Source: Bloomberg BNA The fact that states can determine their own treatment of equity compensation, such as exercised stock options, means there are many inconsistencies in tax treatment. Since employers generally remain liable for the failure to withhold state income taxes, the withholding issue can lead to costly errors and omissions if employers do not have a firm understanding of their obligations to each relevant state or locality. Tracking Employees Across State Lines Filing and remitting on multistate income tax withholding requires tracking employee movement and ensuring withholding is submitted to the correct states. Fifty-nine percent of respondents with mobile domestic workers have a program for withholding nonresident state income taxes. (See Figure 9.) Sixty-six percent of nonbusiness employers with multijurisdictional workers reported having a program for withholding nonresident income taxes, compared to 49 percent for responding manufacturers and 60 percent for nonmanufacturingemployers. By size, larger employers are more likely to say they have a program for withholding nonresident state income taxes from affected workers than smaller employers are (61 percent compared with 50 percent, respectively). Half of the respondents with mobile workers said they included all employees and travel in their nonresident state tax withholding programs, 13 percent included only employees who travel frequently such as salespersons and buyers, 28 percent had programs only in select states and 9 percent limited their programs to only include executives and highly paid employees. Manufacturing employers (37 percent) are the least likely to include all employees in programs for withholding nonresident state income taxes. Nonmanufactur- COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 17

18 Figure 9 Program for Withholding Nonresident State Income Taxes 41% No 59% Yes Note: Percentages are based on the number of employers that have employees that work temporarily or permanently (including short-term business travel) outside of their resident state or local jurisdiction. Source: Bloomberg BNA ing employers are most likely to include all employee groups in their program (53 percent), followed by nonbusiness (49 percent). There were no notable differences in the programs for withholding by size of employer. Please see the Appendix, Question 22, on page 39 for full demographic breakdowns. (See Figure 10.) Figure 10 Employee Groups Included in Program for Withholding Nonresident State Income Taxes All employees/all travel 50% Select states only 28% Employees who frequently travel only (e.g., sales, buyers, etc.) 13% Executives/highly paid only 9% Note: Percentages are based on the number of employers that have a program for withholding nonresident state income taxes. Percentages do not add to 100 due to rounding. Source: Bloomberg BNA The most popular method used for tracking employee movement across jurisdictional boundaries, according to survey respondents, was direct reporting from the 18 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

19 MULTISTATE EMPLOYMENT employee, which included using an employee s calendar (51 percent). Other methods included employee timesheets (33 percent), expense reporting systems (24 percent), travel providers (8 percent) and GPS or similar tracking devices (2 percent). Employers across industries tended to track employee movement across state lines using direct reporting from employees, with nonmanufacturers having the most pronounced preference (52 percent), followed by manufacturing employers (49 percent) and nonbusiness (47 percent). The second most popular tracking method across industries was employee timesheets (40 percent for nonmanufacturers, 24 percent for nonbusiness and 16 percent for manufacturers). Courtesy Withholding, Assistance Among employers responding that had employees residing outside the work state, 45 percent provided courtesy withholding for the resident states, 34 percent chose not to provide it for any employees and 21 percent provided courtesy withholding for certain employees. The overall results for courtesy withholding of state taxes were generally matched by employers large and small in the three industry categories. Fewer surveyed employers provided courtesy withholding for taxing localities where workers reside: 33 percent provided it for all employees residing in those localities, 42 percent chose not to provide it for any employees and 24 percent provided it only for certain employees. The overall results for locality withholding were generally matched by industry, but variances occurred by size of employer. More small employers responding said they provided courtesy withholding for employee s resident localities to all employees than larger employers, but larger employers were more likely to offer such a program to some, but not all, employees. Most employers (70 percent) that have programs for withholding nonresident state taxes reported that they did not pay employees out-of-state nonresident income tax liabilities for short-term assignments; however, 17 percent said they grossed up for certain employees and 13 percent grossed up for all employees. Over three quarters (76 percent) of respondents did not assist employees in the cost incurred for the preparation of state nonresident income tax returns for short term assignments, with 11 percent choosing to assist in the preparation cost for all affected employees and 13 percent assisting certain employees. The number of employers by industry responding they pay out-of-state income tax liabilities for short term assignees also was low, with only 6 percent of nonbusiness entities having that practice for all affected employees, while 15 percent of those employers in manufacturing and 14 percent of nonmanufacturing businesses had such a program in place. Fifteen percent of small employers gross-up taxes for all short-term assignees, and 12 percent of large employers apply the benefit across-the-board. Twenty-three percent of manufacturing employers gross-up for such taxes for some but not all employees, while 19 percent of nonmanufacturing and nonbusiness entities reported having the practice. COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 19

20 As for assisting with the costs employees incur for preparing their personal nonresident returns for short-term assignments, the likelihood such a program for all affected employees is available is lower for manufacturing and nonbusiness employers than in 2015 (16 percent, down from 20 percent, and 3 percent, down from 21 percent, respectively). Twelve percent of nonmanufacturers reported they assisted with the costs, the same as in There were not notable differences by employer size of organizations reporting that they help fund the preparation of state nonresident income tax returns for all short-term assignees. (See Figure 11.) Ernst & Young LLP Observation: If employees hold job positions where travel is customary, businesses should be sensitive to competitors policies concerning tax accommodations like reimbursement and return preparation. Figure 11 Pay State Nonresident Income Tax for Short-Term Assignments for U.S. Domestic Employees (Gross Up) Yes, for all employees 13% Yes, but for fewer than all employees 17% No 70% Source: Bloomberg BNA Following State Guidelines Note: Percentages are based on the number of employers that have a program for withholding nonresident state income taxes. Because of the complexity of tracking the state and local tax statuses for mobile workers, even the most conscientious employers are challenged to ensure all various requirements for taxation by locality are met. Many employers, as a business practice, decide to set an internal length of time standard for out-ofstate assignments before activating withholding and reporting procedures. Almost half (47 percent) of employers with programs for withholding nonresident state income taxes said they follow all state guidelines concerning any de minimis threshold at which state nonresident income tax withholding requirements could be disregarded. Of the rest of the organizations responding, 9 percent set their threshold from zero to 5 days, for 4 percent 6 to 10 days, 12 percent 11 to 14 days and 6 percent said 15 to 20 days. Twenty-two percent of em- 20 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

21 MULTISTATE EMPLOYMENT ployers responding said they disregard state nonresident requirements for employees working for 20 days or fewer in a particular state. Fifty-two percent of responding employers in the nonbusiness category said they follow all state guidelines; nonmanufacturers, 49 percent, and 33 percent of responding manufacturers said they follow all state guidelines all of the time. More than half of small employers responded they follow all state requirements (53 percent), while 45 percent of larger employers said they follow all requirements for nonresident income tax withholding. Year-to-year, manufacturers reported that they were significantly more likely follow a threshold from zero to five days (12 percent in 2016, up from zero percent in 2015) and significantly less likely to report using a 11- to 14-day threshold (4 percent, down from 20 percent). Once withholding starts, 88 percent of responding employers with a nonresident state income tax withholding program said they withheld taxes every pay period, with 6 percent withholding monthly (regardless of pay period) and 6 percent withholding quarterly. For depositing taxes, 74 percent deposit nonresident taxes every pay period, 11 percent deposit monthly (regardless of pay period), 13 percent deposit quarterly and 2 percent deposit annually. These survey results may reflect the fact that employers often are required to make deposits of withheld state taxes according to the volume of amounts withheld over a period of time, so those employers with a single employee in a state may indeed be allowed to make less frequent deposits. Small employers were significantly more likely to make deposits every pay period than in Sixty-eight percent of small employers reported that they did, up from 49 percent in (See Figure 12.) W-2 Issues Difficulties in tracking mobile workers may translate to more issues at year end, particularly with the need to file corrected Form W-2, Wage and Tax Statement, because of errors. The survey results, however, show that 44 percent of responding employers with employees working outside their resident state or local jurisdiction said fewer than 10 percent (1 percent to 9 percent) of their corrected Forms W-2 were attributed to multistate employment issues. Twenty-five percent have no corrected Forms W-2 that could be attributed to some aspect of multistate employment. There remains 13 percent of the employers that said from one-tenth to under one-third of corrected Forms W-2 result from multistate issues, 7 percent of employers said that three-tenths to under a half of their corrected Forms W-2 result from multistate issues, and 12 percent reported that onehalf or more than of their corrected Forms W-2 were related to multistate issues. Though year-to-year there was not a lot of change in surveyed employers corrected forms overall, there were significant changes among different subsets of COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 21

22 Figure 12 How Often Organization Withholds and Deposits Nonresident State Income Tax Withhold 88% 6% 6% 1% Every pay period Monthly (regardless of payroll period) Deposit 74% 11% 13% 2% Quarterly Annually Note: Percentages are based on the number of employers that have a program for withholding nonresident state income taxes. Percentages do not add to 100 due to rounding. Source: Bloomberg BNA employers. More nonmanufacturing and nonbusiness entities said at least 50 percent of corrected forms were due to multistate issues than in 2015 (12 percent in 2016, up from 7 percent in 2015, and 11 percent, up from 2 percent, respectively). More large employers also reported at least 50 percent of errors were due multistate issues (14 percent, up from 9 percent in 2015). The proportion of small employers that reported none of their Form W-2 errors could be attributed to multistate employment declined significantly in 2016 to 38 percent from 51 percent in Please see the Appendix, Question 13, on page 33 for full demographic breakdowns. (See Figure 13.) The increase in form corrections tied to multistate employment arrives as the federal government and many states change Form W-2 deadlines to earlier in the year. Employers should be aware of upcoming challenges associated with the trend of state revenue departments pushing back Form W-2 deadlines to Jan. 31 in an effort to prevent fraud, said Verenda Smith, deputy director of the Federation of Tax Administrators. The shortened deadline would give employers less time to find errors before submitting Forms W-2 and therefore possibly increase the need to make corrections after submitting the forms, she told Bloomberg BNA. Staying Abreast of Changes Forty-two percent of surveyed employers with mobile domestic workers relied on third-party tax advisers to assist them with their multistate tax compliance. The size of the employer mattered little. Of those responding employers with at least 1,000 employees in the U.S., 43 percent said they relied on a tax adviser, while 38 percent of employers with fewer than 1,000 such workers used such services. By industry, 50 percent of the manufacturer respondents said they used 22 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

23 MULTISTATE EMPLOYMENT Figure 13 Proportion of Corrected Forms W-2 that Concern Multistate Employment None 25% 1% to 9% 44% 10% to 29% 13% 30% to 49% 7% 50% or more 12% Note: Percentages are based on the number of employers that have employees that work temporarily or permanently (including short-term business travel) outside of their resident state or local jurisdiction. Source: Bloomberg BNA a third-party tax adviser to assist with U.S. multistate tax compliance, while the use for nonbusiness (38 percent) and nonmanufacturers (41 percent) were more in line with the overall results. To keep up with changes to increase state and local tax law and regulatory compliance, responding employers with mobile domestic workers used several methods. Seventy-five percent used a professional publisher such as a payroll news service or research library to keep track of state payroll tax changes. Other state change tracking methods include payroll organizations (63 percent) and thirdparty tax advisers (39 percent). These results were consistent across industry and employer size. For local payroll tax changes, 72 percent of respondents said they used a professional publisher to keep up with developments, 58 percent used a payroll organization, 36 percent used their third-party tax adviser and 6 percent did not use any of these methods. Similar to tracking state changes, the answers were consistent across industry and employer size. COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 23

25 FOREIGN, NONRESIDENT WORKERS As organizations increasingly seek mobile workers to support businesses in global markets, many are encountering a host of difficult tax compliance issues when those workers are not from the United States, survey results show. Fifty-eight percent of employers responding to the survey said they employed foreign, nonresident workers in the U.S. Foreign nationals authorized to work in the U.S. are classified as either residents or nonresidents for U.S. taxation purposes. The distinction between these two classifications is important because resident aliens, like U.S. citizens, are taxed on their world-wide income, while nonresident aliens generally are taxed only on their U.S.-source income. However, special rules apply to the taxation of the income of nonresident aliens, depending on whether the income is from investments or from work-related activities. (See Figure 14.) Figure 14 Employers Employing Foreign, Nonresident Workers in the U.S. 42% No 58% Yes Source: Bloomberg BNA More than half of the employers in each industry reported employing foreign residents (67 percent of nonbusinesses, 62 percent of manufacturers and 55 percent of nonmanufacturers). Larger companies were significantly more likely than smaller companies to employ foreign nonresidents (64 percent and 42 percent, respectively). Of those surveyed that employed these workers, the majority (67 percent) had a formal tax policy in place to manage their employment. For employers that do not have a policy in place, 37 percent planned to implement such a policy, significantly fewer than last year s 52 percent. (See Figure 15 below.) COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 25

26 Figure 15 Employers Having a Formal Policy to Manage Foreign, Nonresident Employees in U.S. 33% No 67% Yes Note: Percentages are based on the number of employers that employ foreign, nonresident workers in the U.S. Nonresponse is less than 1%. Source: Bloomberg BNA Small and large employers were equally likely to have a formal policy. Large employers surveyed in 2016 were significantly less likely to have a formal policy than those surveyed in 2015 (67 percent, down from 77 percent). By industry, 70 percent of employers in the nonmanufacturer category, 64 percent of nonbusiness employers and 62 percent of manufacturers responding said they had a policy in place. Significantly fewer nonbusiness employers reported having a policy in place than in 2015 (64 percent, down from 88 percent). Of those responding organizations that said they employ foreign, nonresident workers in the U.S., 34 percent said they identified these employees as compliance risks. For employers that identified these workers as risks, 14 percent assigned a high risk for such employees, 56 percent identified the issue as medium level risk, 30 percent assigned a low level of risk. Only 44 percent of employers with foreign, nonresident employees that had not identified the nonresident workers as a risk said they performed a formal assessment of the potential risk imposed before deciding they were not a risk. Just under one-half of nonmanufacturing and nonbusiness employers with nonresidents that did not identify them as compliance risks said they performed a formal assessment of that potential risk; just over one-third of manufacturers responding said they performed such an assessment. There was little variance by employer size. More than half of employers (57 percent) with foreign nonresident workers used a third-party service provider to meet the employer tax obligations pursuant to such employees working in the U.S., 26 percent of responding employers had an in-house software-assisted system and 18 percent had an in-house manual system. Please see the Appendix, Question 34, page 46 for more detail. 26 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

27 FOREIGN WORKERS Eighty-one percent of manufacturing employers used third party services for meeting the employer tax obligations pursuant to foreign, nonresident employees working in the U.S., far more than nonmanufacturing employers, who reported using a third-party service (53 percent). Nonbusiness entities were split evenly between using third parties and in-house software (42 percent and 41 percent, respectively). The proportion of large employers that reported using a third-party service to meet foreign, nonresident employee tax obligations significantly increased from 2015 (57 percent, up from 46 percent). Large employers conformed to the trends of the overall results (57 percent using third parties, 19 percent using in-house manual resources and 25 percent using in-house software programs). Small employers more or less followed the overall results, with slightly more emphasis on in-house software (31 percent) and slightly less emphasis on in-house manual resources (14 percent). Tracking Mobility For obtaining travel data to determine whether a foreign nonresident employee has triggered a U.S. tax obligation, half of those with foreign nonresident workers rely on data obtained directly from the employee, such as viewing employee travel calendars; 25 percent referred to expense systems; 20 percent used employee timesheets and 15 percent consulted travel providers. A third of respondents reported using other means for obtaining this information. Please see the Appendix, Question 35, page 46 for more detail. Relying on data obtained directly from the employee was similarly popular across industries, with 54 percent of manufacturers, 51 percent of nonbusinesses and 48 percent of nonmanufacturers using it. Larger employers were also in line with overall trends, with half saying they rely on data obtained directly from the employee. Smaller employees were slightly less likely (46 percent). Business rules or thresholds for determining when to undertake compliance for foreign nonresident workers were in place for 53 percent of employers that employ such workers. About three-fourths (76 percent) required foreign, nonresident employees to submit treaty exemption forms such as Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, before excluding wages from U.S. income tax and withholding under a treaty exemption. There was a significant increase in the number of small employers reporting that they require treaty exemption forms from 2015 (78 percent up from 46 percent), and this brought that groups responses in line with large employers (75 percent) and overall totals. Nonbusiness employers and manufacturers were the industries most likely to require the forms (85 percent and 83 percent, respectively), trailed by nonmanufacturers (70 percent). Tax Assistance More than half the employers with foreign, nonresident workers did not pay nonresident income taxes on behalf of the employees (58 percent). However, 20 per- COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC., 27

28 cent responded that they grossed up for all foreign, nonresident employees, and 22 percent grossed up for only certain employees. Fifty-six percent of respondents with foreign, nonresident workers also did not assist them in the cost incurred for the preparation of any of their nonresident income tax returns; however, 25 percent provided assistance with the forms for all employees and 19 percent provided assistance for only certain employees. Manufacturers with nonresident workers were most likely to gross-up and pay income taxes for all (33 percent). Nearly two-thirds of nonbusiness (64 percent) and nonmanufacturing (60 percent) entities responded they did not pay for any taxes, compared to 46 percent of manufacturers that responded. Similarly, as for assistance in helping nonresidents file U.S. tax returns, manufacturers were most likely to assist all nonresidents (41 percent). More than half of nonmanufacturing employers (52 percent) and nearly three-fourths of nonbusiness entities (72 percent) reported providing no assistance in filing U.S. tax returns, compared to 33 percent of responding manufacturers. Ernst & Young LLP Observation: In an increasingly global economy, businesses that do not provide tax equalization to employees traveling internationally should consider how such policies assist in attracting and retaining talent. 28 COPYRIGHT 2016 BY THE BUREAU OF NATIONAL AFFAIRS, INC.,

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American Payroll Association

American Payroll Association Government Relations Washington, DC June 2, 2015 Statement for the Record Submitted to the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law In