Inconsistent state income tax rules burden mobile workforce
What we ask of you
Senators: Co-sponsor S. 386
- Employees of businesses with interstate operations may be required to travel outside their resident state for work, often for short periods of time. These brief trips translate to a significant regulatory burden for employees and employers in complying with nonresident state income tax withholding laws.
- Each state has its own requirements for filing nonresident individual income tax returns and commensurate rules for employer withholding on those employees. Of the 41 states that impose income tax on wages:
- Some have a de minimis threshold for nonresidents before taxes must be withheld and paid.
- Others have a de minimis exemption based on the amount of the wages earned while in the state.
- Some impose an income tax obligation for just a single work appearance in the state.
to establish a uniform national standard for state nonresident income tax filing and withholding.
Six key challenges faced by employees and employers:
Grant Thornton supports a uniform and fair national standard for state income taxation
- Employer administrative burden — Employers often withhold income from day one of work in nonresident states as a precaution against the extraordinary expense of establishing internal tax withholding systems that adjust for varied state rules.
- Employee filing burdens — Given the lack of uniform rules, employees must determine if their activity in nonresident states is exempt, and often must file multiple state individual income tax returns — either to claim a refund on income incorrectly withheld or to make additional tax payments.
- Risk of double taxation — The state in which an employee works is entitled to impose a tax on income earned in that state, and the employee’s state of residency may also impose a tax on all of the employee’s income. Most states have credit mechanisms in place in an effort to prevent double taxation, but obtaining these credits on the resident return can be extremely complex, and the employee may not get full relief.
- Reciprocity agreements aren’t prevalent — Some states have regional reciprocity agreements under which two or more states agree not to tax nonresidents across border(s). But because the agreements are localized geographically, many mobile employees remain subject to multi-state filing and risk double taxation.
- Tax credit unavailable in some states — Nonresident workers living in states with no individual income tax are unable to take a tax credit in their resident state for income tax paid in nonresident states.
- Current rules detract attention from business objectives — Dynamic companies — especially in the current economy — could be focused 100% on business operations, job creation and employee retention. Instead, they must invest time and money dealing with myriad state tax withholding obligations.
- Grant Thornton supports enaction of bipartisan bills H.R. 2315, the Mobile Workforce State Income Tax Simplification Act of 2015, introduced by Rep. Mike Bishop (R-MI) and Rep. Hank Johnson (D-GA) and S. 386, the Mobile Workforce State Income Tax Simplification Act of 2015, introduced by Sen. Sherrod Brown (D-OH) and Sen. John Thune (R-SD).
- H.R. 2315 and S. 386 would create a fair, administrable and uniform national standard that ensures that an employee pays state income taxes to jurisdictions in which that employee works for a substantial amount of time during the year.
- The bill sets a de minimis standard for mobile workers, whereby an employee working in a nonresident state for no more than 30 days would have no tax liability in that state, and the employer would have no withholding obligation.
- H.R. 2315 and S. 386 benefit U.S. businesses and employees by:
- enhancing compliance with state personal income tax laws,
- simplifying burdens placed on employees in filing multiple state tax returns annually,
- increasing employee time available for work matters,
- reducing employee filing costs,
- increasing potential pool of workers willing to take on out-of-state work, and
- simplifying administrative burdens placed on employers, freeing them to focus on growing the business.
- Current status of the legislation:
- The House passed H.R. 2315 in September 2016.
- S. 386 is currently awaiting passage in the Senate.