In a recent blog post, we discussed the tax withholding and reporting complexities that can arise when employees earn equity or deferred compensation while working in more than one state. Therefore, it is timely to report on an effort at the federal level to harmonize threshold tax requirements in multi-state employment scenarios.
New 30-Day Rule
On June 20, 2017, the “Mobile Workforce State Income Tax Simplification Act of 2017” (H.R. 1393) passed the House of Representatives with bipartisan support. The bill prohibits state taxation of wages or other remuneration earned by an employee who performs employment in more than one state other than by:
- The state of the employee’s residence, and
- The state within which the employee is present and performing employment duties for more than 30 days during the calendar year in which the wages or remuneration is earned.
The bill therefore prevents a state from taxing remuneration earned by an employee who works in the state for 30 days or less in a calendar year. It also relieves employers from obligations to withhold or report state income tax on such remuneration. The bill covers all employees, as defined under state law, with the exception of professional athletes and entertainers, qualified production employees, and certain public figures.
Counting and Tracking of Days Worked
The bill also sets rules for counting and tracking the number of days an employee spends in a state for purposes of determining whether the 30-day threshold is met.
An employee will be considered present in the state in which he or she spends the most time (excluding travel time) during the day, except if the employee works in only one state other than his or her state of residence, the employee will be counted as having worked a day in that non-resident state.
In determining its tax obligations, an employer is generally permitted to rely on the employee’s determination of time spent in each state, but if the employer maintains a time and attendance system that tracks where the employee performs duties on a daily basis, data from such system is required to be used.
The introduction of a uniform 30-day rule for triggering state income tax and related employer withholding and reporting obligations would bring welcome certainty, as well as simplicity, to the taxation of U.S. business travelers and mobile employees, allowing for focus on the states in which employees spend a material amount of time during a year and facilitating tax and employment planning. When sourcing equity award or other long-term incentive income earned over multiple years, the ability to exclude states in which an employee worked for 30 or fewer days a year would reduce compliance and administrative costs for both employers and employees.
An identical bill has been introduced in the Senate, and although it is not certain when it will be reviewed, it enjoys bipartisan support. If enacted, the legislation will take effect on January 1 of the second calendar year that begins after the date of the enactment.
We will be watching the progress of the Senate bill, so stay tuned for future updates.