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Implications of the Mobile Workforce State Income Tax Simplification Act of 2013

An issue currently moving its way through federal legislation is uniform treatment of multistate employees subject to state withholding of income tax, known as the “Mobile Workforce State Income Tax Simplification Act of 2013”.

In this article, we will examine the issue of multistate employment tax withholding and the implications of this proposed legislation.

Current Practices

Currently, most manufacturing or distribution firms don’t proactively address or track employees working in multiple states. For instance, if an employee lives in Georgia but is assigned to work on a project in North Carolina, the state income taxes should be withheld for North Carolina for the time spent in that state.

Impacting time and payroll systems, this process is tedious and complicated. In addition, every state has its own law regarding state income tax withholding for non-resident employees.

If an employer fails to comply with the particular state’s withholding provisions, an audit could be triggered. There is no safe harbor or grace period to put tracking of time and wages in place. Compliance is critical, yet complex and confusing.

Accurately tracking employees time and wages in other states means having to adjust timekeeping systems and payroll systems. Employers must be able to flag when an employee is working in another state. Another complication is how to handle salaried employees who aren’t paid hourly wages and don’t track time at all.

When an audit is triggered, the burden of proof is on the employer. Travel records and documentation are the initial source of information. However, many employers find it difficult to track down this type of information. Smart employers keep records of where employees are traveling for work, and tie these travel records back to timekeeping and payroll systems to comply with state tax withholding.

Making Life Easier with the Mobile Workforce state Income Tax Simplification Act of 2014

With the proposed legislation on the table, if an employee travels and works in another state, withholding of state tax in that state would commence after a predetermined time period, such as 20 or 30 days. This would apply uniformly to all 50 states.

While this simplifies things for employers, employers still have the burden to prove time and wages of employees working in multistates.

In light of this new legislation, we strongly recommend employers put a policy in place to track employees’ travel records. Make sure your travel, timekeeping and payroll data provide the compliance evidence required.

If you have questions on how to develop a practical policy to handle multistate withholding tax compliance, please contact Anne Yancey.