In today’s business environment, many businesses have employees who travel as part of their regular duties. According to a recent U.S. Travel Association analysis, there were 459 million business trips in the United States in 2016. That works out to 1.3 million business trips each day. Business travel has increased by 4% between 2011 and 2016, while spending on business travel has increased 43% over the same time period. This trend is expected to continue for the next several years.
A business trip can have many purposes, including general business, employee training or seminars, client or customer meetings, internal business meetings, sales and marketing meetings or attendance at conventions or tradeshows. However, when employees travel on company business, employers may not be aware of all the tax issues that can arise from domestic trips.
Multi-state withholding issues
Employees who travel over state lines to perform services can create tax issues for their companies. Employees who perform services in a non-resident state, for instance, can be subject to non-resident state income tax withholding in that state. State income tax withholding is generally sourced to the state(s) where the employee is providing services, not where the employee resides. While some states have a de minimis threshold based on either time spent in the state or a specific dollar amount, most states do not have a threshold before employers are liable for income tax withholding.
As an example, New York allows a non-resident employee to perform services in the state for 14 days in a calendar year before assessing state income tax withholding. California, however, has no de minimis threshold and will assess state income tax withholding on the first day an employee performs services in the state.
Some states, mainly in the East and Midwest, have reciprocal withholding agreements. A reciprocal withholding agreement is an agreement between two states that allows the residents of one state to request exemption from withholding in the other (reciprocal) state. For example, if an employee resides in New Jersey but works in Pennsylvania, an employee can request that the company not withhold state income tax in Pennsylvania and only report the wages to New Jersey. An employee needs to provide the employer with the proper paperwork in order for reciprocity agreement to be in place. If the employee does not provide the proper paperwork, an employer should withhold to the state where the services are being performed. In this example, the state income tax withholding should then revert to Pennsylvania.
At the end of the year, an employee may find he or she has state income tax filing requirements in multiple states. If an employer does not withhold state income tax in the states where the services are being performed, the employer could be liable for the tax, along with any applicable penalty and interest.
Business expense reimbursements
Most companies that have employees who travel for business reimburse their employees for their business travel expenses. These expenses can include airfare, meals, lodging, car rental, mileage reimbursements and per diems, among others. Depending on how the expenses are reimbursed, or even depending on the type of expense, the result can be a taxable benefit to the employee.
In order for a business expense to be nontaxable to an employee, the expense must be reimbursed under what is called an “accountable plan.” An accountable plan is a reimbursement, or other expense allowance arrangement, that satisfies three basic requirements-- 1) the expense has a business connection, 2) the employee provides substantiation of the expense in a reasonable manner, and 3) the employee returns any excess amounts to the employer. If these conditions are not met, the reimbursement is considered a wage subject to all employment taxes.
Some companies provide a meal per diem to employees who travel locally. What many companies don’t realize is that a per diem is non-taxable to the employee if the employee is traveling away from his or her tax home and has either an overnight stay or stops for a required rest break. A per diem that does not meet overnight stay or rest break requirements is considered a wage subject to all employment taxes.
The length of a travel assignment for an employee can also determine whether the expense reimbursements are taxable to an employee. If an employee is on a temporary assignment away from home, the expenses that are reimbursed under an accountable plan are not taxable to the employee. However, if an employee is on an indefinite assignment away from home, even those expenses that are reimbursed under an accountable plan could be taxable to the employee and subject to all employment taxes. “Temporary travel” is defined as an assignment that is reasonably expected to last for one year or less while an “indefinite assignment” is one that is reasonably expected to last more than one year.
The examples cited above are only a few of the issues that can arise when employees travel. Often, businesses can obtain a better understanding of their domestic travel tax obligations by talking with an outside consultant.
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