Multistate Withholding

Transcription

1 Multistate Withholding APA NY Metro Chapter Jon Stone Manager, New York, NY Global Mobility Services Employment Tax February 25, 2016

2 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 1

3 Speaker Introduction Jon Stone Manager KPMG LLP Global Mobility Services, Employment Tax 2

4 Agenda Introduction to multistate withholding Identifying multistate withholding issues New York regulations Connecticut regulations and change Evaluating and mitigating risks Self-Evaluations APA/KPMG survey results Current trends About KPMG employment tax 3

5 Ten leading payroll function characteristics 1. Global operating model with high leverage of shared services 2. Business partner oriented role/strategic advisor 3. Information driven using data and analytics 4. Global/core payroll platform for core payroll processes 5. Standardized, integrated, automated processes 6. Global Compliance with withholding, depositing and reporting to all jurisdictions 7. Multi-state jurisdictional taxation 8. Worker Classification 9. Data Security 10. Global Cultural Management 4

6 Multijurisdictional withholding A perfect storm Corporate, payroll tax compliance Broader use of equity awards Long Term Awards Complexity around awards Globally mobile workforces Difficulty in controlling the process Focus by media Increased scrutiny by tax authorities Corporate monetary and brand risk Localities joining in Mobile Employees Regulatory Activity/Tax Compliance 5

7 Nonresident state income tax withholding In general, employers are required to withhold SIT on nonresidents of a state if services are or were performed by the employee in that state Section 114 (former Public Law ) exception retirement/pension income Applicable to qualified pension income only Generally not applicable for equity compensation, bonus, deferred comp, etc. Exceptions/limitations: De minimis rules of certain states (not always applicable to equity compensation) Reciprocal agreements between states Telecommuting (convenience of the employer doctrine) Exemption certificate allocation and pre-allocation of time spent 6

8 Nonresident withholding De Minimis jurisdictions WA As of February 1, 2016 OR CA NV ID AZ UT MT WY CO NM ND SD NE KS OK TX MN IA MO AR LA WI IL MS IN MI KY TN AL OH GA WV SC ME VT NH MA NY CT RI PA NJ DE MD VA NC DC FL AK HI Source: KPMG LLP Global Mobility Services States with de minimis rules or exceptions States without de minimis rules or exceptions States with no withholding provision 7

9 New York non-resident wages and DeMinimis NY Non-Resident Employees: Wages allocated to NYS is the number of days worked in NYS over the total days worked both in and out of NYS NYS tax withholding is exempt on non-residents if: The employee is assigned to a primary work location outside of NYS The employer reasonably expects that the employee will work in NYS for 14 days or fewer in the calendar year The employee does not work in NYS for more than 14 days Certain wage payments to non-residents are not exempt: Deferred compensation and non-statutory stock options Compensation for athletes, entertaining performers, or public speakers Compensation paid to a traveling salesperson based on the volume of business transacted 8

10 New York non-resident wages and DeMinimis (continued) Days spent in NYS that are excluded from the 14-day count: job-related training: in-house or trade association conferences or symposia Professional development workshops, seminars, or conventions If at any time during the tax year a nonresident employee performs services in NYS, the amount of wages that must be reported in the Box 16 State Wages on the Federal Form W-2 must be equal to the amount of wages reported in Box 1 Federal Wages Source: New York State Department of Taxation and Finance TSB-M-12(5)I 9

11 New York Form IT An employer can effectively rely on an NYS non-resident employee to complete Form IT to determine wage allocation during a given year 10

12 New York Form IT (continued) Employees complete the form at the beginning of a calendar year effective that year Determine frequency of travel to NYS (work with personal tax accountant) Baseline of 240 workdays: excludes weekends/holidays; 4 weeks PTO Estimate of total time worked in NYS during calendar year Training events in NYS do not count as a NYS workday Student or teacher, internal or external Only driving through NYS should not count as a NYS workday No half-days: 1 minute of working in NYS counts as a whole day Does not apply to NYS residents The percent allocation will be applied to wages Wages first sourced to primary work state, then to NYS Tax determined in both states after allocation 11

13 New York non-resident day allocation examples (1) Employee Y is a nonresident and is assigned to a primary work location outside of New York State. Employee Y works 25 days in New York State. Fifteen of the 25 days are spent at an in-house training course. Employee Y has no New York Withholding. The auditor should not assess the employer for any tax, penalty or interest on Employee Y, since the 15 in-house training days are not counted against the 14 days. (2) Employee Z is a nonresident assigned to a primary work location outside of New York State. On audit it is determined Employee Z performed services as detailed below; Days worked in primary work location state( non-ny) 195 Days worked in NY in house training 15 Days worked in NY non-training 30 Total days worked 240 Employee Z s withholding was based upon an estimated percentage of services performed in New York of 12.5% (30/240). 12

14 New York convenience of the employer test Convenience of the Employer Test Any normal work day spent at an employee s home office will be treated as a day worked outside the state if the taxpayer s home office is a bona fide employer office Any day spent at the home office that is not a normal work day would be considered a nonworking day A normal work day means any day the employee performed the usual duties of his/her job: Responding to occasional phone calls or s Reading professional journals or being available if needed does not constitute performing the usual duties of his or her job. In order for an office to be considered a bona fide employer office, the office must meet either: a) the primary factor, or b) at least 4 of the secondary factors and 3 of the other factors Source: New York State Department of Taxation and Finance TSB-M-06(5)I 13

15 New York convenience of the employer test (continued) Primary Factor: The home office contains or is near specialized facilities Secondary Factors: Needs to Meet at Least 4 1) The home office is a requirement or condition of employment 2) The employer has a bona fide business purpose for the employee s home office location 3) The employee performs some of the core duties of his or her employment at the home office 4) The employee meets or deals with clients, patients or customers on a regular and continuous basis at the home office 5) The employer does not provide the employee with designated office space or other regular work accommodations at one of its regular places of business 6) Employer reimbursement of expenses for the home office Source: New York State Department of Taxation and Finance TSB-M-06(5)I 14

16 New York convenience of the employer test (continued) Other Factors: Needs to Meet at Least 3 1. The employer maintains a separate telephone line and listing for the home office 2. The employee s home office address and phone number is listed on the business letterhead and/or business cards of the employer 3. The employee uses a specific area of the home exclusively to conduct the business of the employer that is separate from the living area. The home office will not meet this factor if the area is used for both business and personal purposes 4. The employer s business is selling products at wholesale or retail and the employee keeps an inventory of the products or product samples in the home office for use in the employer s business 5. Business records of the employer are stored at the employee s home office 6. The home office location has a sign indicating a place of business of the employer 7. Advertising for the employer shows the employee s home office as one of the employer s places of business 15

17 New York convenience of the employer test (continued) 8. The home office is covered by a business insurance policy or by a business rider to the employee s homeowner insurance policy 9. The employee is entitled to and actually claims a deduction for home office expenses for federal income tax purposes 10. The employee is not an officer of the company Source: New York State Department of Taxation and Finance TSB-M-06(5)I 16

18 Connecticut non-resident legislation Non-Resident De Minmis for 2016 and Years Thereafter: Withholding required at the point it is known the employee will work in Connecticut for 15 or more days in a year If a nonresident employee breaks 15 days, withholding is required including on the compensation paid for days 1-15 Any part of a day spent performing services in Connecticut counts as a full day spent performing services in Connecticut De Minimis for 2015 and Years Prior: Same as above, with two changes 14 days instead of 15 No retroactive withholding for employees exceeding 14 days Source: CT Publication, Circular CT (Rev. 01/16) Source: CT Publication, Circular CT (Rev. 01/15) 17

19 Connecticut non-resident legislation (continued) Days spent in Connecticut that are excluded from the de minimis day count: Any day spent for the sole purpose of job-related training, such as in-house training courses, trade association conferences or symposia Any day spent in professional development workshops, seminars, or conventions Source: C.G.S.A

20 State withholding audit activity (samples) New York Aggressive enforcement for almost a decade Large assessments especially on allocation of equity compensation California Aggressive since the mid-90s New initiative for auditor hiring/training San Francisco Payroll Expense Tax (being phased out) Minnesota Cancellation of WI reciprocity, taxation of nonresident equity compensation Increase in audit activity in states that border a state with no personal income taxes Massachusetts, Georgia, etc. 19

21 Assessing risk Review of 25 global locations to understand Tax, P & I exposure Specifically regarding employer compliance for equity compensation: reporting/withholding Takeaways: Frequently, country taxing authorities will levy penalties and interest against the employer for failure to operate payroll withholding and/or reporting, even if the income is reported on the annual tax return Penalty and interest amounts vary widely across countries: China: Up to 500% of underpaid tax Hong Kong: Up to 300% of tax due to under reporting + fine Poland: Fines of up to PLN 18,000,000 (approx. $5.3M) Singapore: Up to 200% of tax due to under reporting Thailand: Up to 100% of underpaid tax + fine Venezuela: Up to 500% of underpaid tax Tax authorities may agree to mitigate penalty/interest charges if employer voluntarily discloses compliance failure 20

22 KPMG survey information by country Source: KPMG Member Firms Current or increase in audit activity Europe Americas Belgium Canada Cyprus Costa Rica Germany Honduras Greece Mexico Kazakhstan United States Ireland Asia Norway China Portugal Hong Kong Spain India Sweden Japan Switzerland Korea United Kingdom Malaysia Africa Singapore Botswana Australia Morocco South Africa 21

23 Qualifying & quantifying the issue Frequent business travel can create two types of exposure Financial Individual level Failure to pay individual income tax Failure to file individual income tax returns Prevalent on equity compensation not reported in nonresident jurisdiction Corporate level Failure to report income and/or withhold income tax Costs can include tax principal, penalty and interest for all open periods Ongoing scrutiny by taxing authorities Reputational, perception of failure to pay taxes on employee income 22

24 Multistate withholding risks and control obstacles Barriers to compliance Time and expense system limitations Third-party vendors unable to comply Corporate culture Employee impact Employers cannot track employee movement on a daily basis Inconsistent policies and procedures for monitoring a mobile workforce Potential risk associated with noncompliance Aggressive enforcement for almost a decade Audit risk Public relations Tax principal/penalty/interest assessments 23

25 Equity awards and related compensation Basis for equity based compensation typically spans multiple years Employers required to allocate gain based upon time an employee performs services in a particular jurisdiction. Highly compensated individuals, such as C suite executives, travel to numerous states while executing their responsibilities. States are aware of such employee movements and are becoming more aggressive in their enforcement efforts with respect to employer withholding. Public corporations, private equity firms, financial institutions and non-u.s. based companies with U.S. presence are key audit targets Bonus allocation challenges, i.e., withholding current year taxes based on prior year services related to bonus payment 24

26 Multi-jurisdictional withholding What can be done Evaluation/assessment Identify jurisdictions and employees likely to have material activity Identify records/sources that provide indicators of activity Determine pay types, e.g., base comp, equity, bonus, etc. Compliance policy design Determine processes Methodology of data capture (travel records, employee data entry, etc.) Real-time compliance Communication and training to/for employees Internal audit procedures Practical issues/concerns Phased roll-outs IT/Technology/Security issues Deployment Timeframes 25

27 Narrowing the field How to filter? All employees Business travelers Business travelers with potential exposure 26

28 Mobile employee challenges The road to compliance Collection Assessment Action Communication Governance Compliance 27

29 Collection Collection Assessment Action Communication Governance Compliance Employee/delegate input, IP address, smart phone, location services Single versus multiple platforms User acknowledgement/reminders Timing of submission and locking data Data storage warehouse Security (IT Risks) 28

30 Assessment Collection Assessment Action Communication Governance Compliance U.S. Considerations State de minimis rules Reciprocity Agreements State specific exemptions Global Considerations Double tax agreements, social security, immigration Risk profile 29

31 Action Collection Assessment Action Communication Governance Compliance Allocation between multiple jurisdictions Payroll calculations Delivery of pay Store allocations and track for long term incentives Integration/Connectivity with multiple systems and stakeholders Employee compliance (tax returns, visa, work permits etc.) 30

32 Communication Collection Assessment Action Communication Governance Compliance Employee communications (including reminders) Policy awareness (funding of taxes, multi jurisdiction filing requirements, payroll calculations versus final liabilities) Ongoing and new hire training Identify and publish contacts 31

33 Governance Collection Assessment Action Communication Governance Compliance Policy owners Travel policies Internal audits (e.g., expense reports) Non compliance sanctions/penalties Quarterly reviews External audit support 32

34 Self-evaluation Using our discussion so far as a basis: Does your company currently track non-resident employees who perform services in New York and Connecticut for purposes of allocating wages and taxes? Is multi-state compliance a growing concern within your company? What challenges would you encounter trying to systematically allocate wages and withholdings to the states where non-resident employees are performing services? 33

35 APA survey results

36 Non-resident workforce survey Joint survey conducted by the American Payroll Association and KPMG Survey results collected in November 2014 Over 1,100 respondents amongst 20 different industries 35

37 Question 1 Is U.S. non-resident state withholding/reporting a major or growing issue for your organization with respect to compliance and/or risk? Yes, it is a major issue 36% 23% Yes, it is a growing issue 41% No, not viewed as a corporate risk 36

38 Question 2 Is global withholding/reporting a major or growing issue for your organization with respect to your globally mobile short-term business traveler employee base? 17% Yes, it is a major issue 50% Yes, it is a growing issue 33% No, not viewed as a corporate risk 37

39 Question 3 Do you currently have procedures and/or technology in place to monitor U.S. employee work travel and remit/report taxes accordingly? 29% 10% Yes, we have technology in place to facilitate tracking and taxation Yes, we have procedures in place to track and tax accordingly 25% 36% Yes, we have both procedures and technology in place No, we do not track U.S. state-tostate travel 38

40 Question 4 If your organization has not implemented U.S. state tracking and taxing compliance policies and procedures, do you anticipate implementing such a program in the next: Less than 6 months 36% 40% 6 to less than 12 months 12 to less than 24 months 17% 7% 24 months or longer 39

41 Question 6 Have you been audited or under review from any U.S. state or local jurisdiction with respect to nonresident withholding/reporting compliance? 21% 2% No, we have not been reviewed at this time Yes, we have been audited or under review 77% Yes, we have had inquiries from outside the U.S. 40

42 Question 7 Does your organization currently or expect to provide tax support to employees working in multiple U.S. jurisdictions? 10% No, we do not currently or would not provide additional support to these employees 15% 15% 60% Yes, gross-up additional tax costs and provide tax return preparation support for other than primary states Yes, provision of tax return preparation support for other than primary states Yes, to gross-up additional tax costs 41

43 Question 8 Would you consider implementing a multistate withholding policy and technology which included tracking your employees by GPS via their mobile phone? 32% No Yes 68% 42

44 Current trends Multijurisdictional Withholding Focus on Mobile Workforce, Key States Proposed U.S. Legislation, House Passage State/Country Trends Worker Classification (Independent Contractor) Issues IRS/State Audits and Related Activities IRS Audits Fringe Benefits/Independent Contractors Gift Cards, Air Travel, Corporate Cars/Allowances, Spousal Travel, etc. Long Term Travel expenses Payroll Process & Procedure Analysis 43

45 Employment tax services Business Traveler (U.S.) Services Transactional Assistance Process & Procedure Reviews Tax Dispute Resolution Independent Contractor Review Global Mobility Taxation (Multistate Withholding) Fringe Benefit Taxation Worker Classification Issues 44

46 Jon Stone Manager Global Mobility Services, Employment Tax Phone: (New York, NY) Phone: (Short Hills, NJ) Thank you

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