By Don C. Brunell, president, Association of Washington
Business
Have you ever traveled to another state for your job, perhaps to
attend a business meeting or a conference? Most people have. But
few people realize that they may owe income taxes in that other
state.
In all, 41 states levy a tax on the income earned by nonresident
employees during their time in the state, even if they’re just
attending a conference. Each state calculates its tax differently —
24 states levy the tax from the very first day, while 17 others,
including Oregon, Idaho and California, set thresholds of how long
the nonresident employee can work before the tax liability is
triggered.
Needless to say, this is an administrative nightmare for
employers, particularly those with multiple locations or employees
who travel frequently. It is the employer’s responsibility to
calculate and withhold the taxes from their employees’ paychecks,
and it’s the employee’s responsibility to file income tax returns
in states that require it.
Complying with those obligations is complicated, costly and
confusing, particularly for medium and small employers.
Each state has different tax rates, tax triggers and varying
notions of what constitutes income and how to define a work day.
Calculating each traveling employee’s tax burden must be done by
hand, because payroll systems are not built to allow withholding in
multiple locations during the pay period. Cross checking travel
vouchers can’t be done automatically either, because travel
reimbursements and payroll are two separate systems.
Because of the difficulties involved, most employers are not in
compliance. According to The Council On State Taxation, because the
information must be tracked and collected manually, employers with
workers who travel frequently would need to add two or three
employees just to comply with the law, adding $150,000 or more to
the budget.
Imagine if you had to deal with something similar.
Imagine that your property tax isn’t based on your house as a
whole, but calculated at a different rate for each room. The tax
rate for your kitchen is different than the tax rate for your
living room, etc. In order to pay the appropriate amount, you must
keep a log of how much time you utilize each room and calculate
your tax based on the time and tax rate for each room.
Now imagine you have a spouse and four kids. To figure out your
tax liability, you must keep track of how much time each of them
spent in each room in your house and use that data to calculate
your total property tax.
Impossible? That’s how many business owners feel.
Fortunately, there’s a solution. It’s called the Mobile
Workforce State Income Tax Simplification Act. This
complicated-sounding legislation greatly simplifies the task of
tracking and withholding state income taxes for traveling
employees.
The bill would establish a uniform national requirement that
nonresidents must work in a state for more than 30 days during a
calendar year before they’re subject to out-of-state income taxes.
The bill defines what a work day is and, to prevent double
taxation, it clarifies that employees can get a tax credit in their
home state for income taxes paid to other states. Analysts have
determined that the measure is largely revenue neutral for the
states.
The measure has already passed the House with bipartisan
support. On September 12, nearly 200 business leaders wrote
Majority Leader Harry Reid, D-Nev., and the rest of the Senate
leadership urging them to pass the legislation.
This bill is a simple fix to a complicated problem that
preserves revenue for the states while saving money for employers.
The Senate should pass it quickly and send it to the president for
his signature.
