Gone are the days that employees worked from only one location from 9:00 a.m. to 5:00 p.m. With employees traveling throughout the U.S., and in many instances, having some employees telecommuting, a company must be diligent. These mobile employees can give rise to potential state and local tax obligations for the employers in unexpected jurisdictions and create tax compliance challenges for even the most diligent employers.
While tax requirements vary significantly among the states, mobile employees can result in tax filing obligations for corporate income taxes, sales and use taxes, payroll taxes and the myriad of other state and local taxes that are imposed in various jurisdictions. In this article, we discuss the potential state payroll tax filing requirements for mobile employees, the proposed federal legislation that could impact these requirements and best practices for remediating past exposures, managing prospective tax filing obligations and handling audits involving mobile employees.
In most states, payroll tax filing requirements generally include income tax withholding on employee earnings, unemployment insurance contributions and disability insurance contributions. Generally, for withholding purposes, residents are subject to withholding on all of their wages, while nonresidents are subject to withholding only on their wages earned within that state.
Thus, employers are left to determine where their employees earn their wages.
Moreover, if an employee receives compensation attributable to more than one year—such as stock options—employers can face significant challenges with determining how to allocate the compensation to each state.