Employment Tax Withholding Compliance


Nearly all large companies have workers traveling throughout the country. These traveling employees create a state and local tax obligation for companies—nonresident personal income tax withholding obligations—with which even the largest and most sophisticated companies struggle to achieve adequate compliance. Because a failure to accurately withhold state income tax on traveling executives will directly impact the employees’ personal income tax obligations, companies’ executive teams often are directly impacted by this tax compliance challenge.

Compliance Obstacles

States’ withholding tax laws are a patchwork of laws, making full compliance difficult for multistate companies. Many states have low thresholds for determining when a company must begin withholding income tax on a traveling employee. For example, New York State requires employers to withhold tax from the wages of nonresident employees that work in the state after only 14 work days.

Ambiguous rules are another obstacle to companies trying to comply with nonresident withholding tax laws. For example, many states adopt a dollar threshold as opposed to a days worked threshold. Dollar thresholds create uncertainty for employers. It may be difficult for employees to estimate the amount of income that will be earned in a year, a necessary metric in determining whether to activate withholding in a state, much less attribute that income to a particular day. Companies struggle with creating systems and processes that can accurately capture and record the necessary data to report nonresident withholding tax.

Proposals to Simplify

To modernize and simplify state withholding tax compliance and enforcement, two competing proposals are being offered. Last year, with the support of various employers and trade groups, federal legislation H.R. 2110, the Mobile Workforce State Income Tax Fairness and Simplification Act, was introduced. If signed into law, H.R. 2110 would establish a national framework for states to require an employer to withhold tax from a nonresident employee’s wage or nonwage payments attributable to service performed in a state. Partially in response to this legislation, the states, working through the Multistate Tax Commission (MTC), are developing a model withholding state statute. The model statute is an attempt to encourage states to voluntarily adopt uniform withholding tax rules.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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