Experts Highlight Challenges of Business Traveler Tax Compliance

Business travel is a growing concern for companies, according to experts from Bloomberg BNA, Ernst & Young, and the Minnesota Department of Revenue. A 90-minute webcast covered pressing issues including nonresident income taxes, payroll compliance and audit defense. Below are highlights from the discussion.

Nonresident Tax Enforcement Rising Steadily

It’s estimated that U.S. business travelers will take 492.1 million trips in 2015, up 1.7% from the previous year. At the same time, state audit rates are rising steadily and business travelers are in the crosshairs.

Which states have the most to gain from pursuing nonresident income taxes? EY’s Kristie Lowery stated there are three major factors:

  1. If a state has a high volume of nonresident visitors
  2. If the business traveler doesn’t pay income tax in her resident location
  3. If the nonresident income tax rate is greater than the resident tax rate (this is most likely in states with very high personal income tax rates)

“The question is no longer if employers should comply with nonresident income tax, but how,” said Lowery.

Understanding Nexus for Resident Income Tax Withholding

What triggers nexus?

Nexus is typically triggered when a company conducts business or has some type of business connection to a location.

Are there general guidelines to what constitutes nexus for income tax withholding purposes?

In general, employee work presence in a state is taken into consideration. However, state and local laws vary in how they define what constitutes nexus. In addition, other factors can affect nexus for other business taxes, such as franchise and corporate taxes.

What is the Business Activity Tax Simplification Act (H.R. 2584)?

The Business Activity Tax Simplification Act is a bill that would prohibit states from imposing corporate and/or gross receipts taxes to companies with physical presence in a state for fewer than 15 days. The act was recently cleared by the House Judiciary Committee for a full House vote.

What is courtesy income tax withholding?

Employers may withhold resident income tax for the employees’ convenience, even if there isn’t nexus. However, it’s important to be aware that special registration may be necessary to avoid incorrect assessments of other business taxes.

Payroll Tax Pitfalls

Important payroll tax variables include whether the employer, employee, and wages are covered.

Employers – Some types of employers and industries may be exempt from nonresident income tax requirements. Non-profit organizations and government employers are exempt from FUTA.

Employees and employment – Variables that affect whether withholding and employment tax apply include the type of employment, employee-specific exemptions, time worked in the location, and worker classification.

Wages – Every jurisdiction maintains its own definition of covered wages. Some common exclusions include health or welfare benefits and qualified retirement plan contributions. However, these exclusions don’t always apply, depending on the jurisdiction and tax type.

Putting a Process in Place

When putting in place a policy, change management and communication are crucial. Employees need to understand why a new process is being put in place and how it may affect them. Tim Dalton from Ernst & Young stated that companies can perform a one-minute tax risk assessment, ranking their risk from high to low on each of the five phases of mobile workforce income tax compliance: policy design, trip tracking, tax research, tax onboarding, and withholding and reporting.

“Communication and consensus among stakeholders and coordination with service providers are key to designing and maintaining an effective system for managing your mobile workforce,” said Dalton.

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