Tax question: Nexus for company but for employees too?


D

daysdreaming

Hi! We are a small commercial diving company based in
Indiana. We send a team of 5 divers (employees, not
independent contractors) to various states for short periods
of time to perform services. The company for whom the work
was performed pays us the total invoice for labor and
materials, and then we pay our employees from our business
payroll account. Our business pays taxes to that state in
which the work was performed at the end of the year. Are we
legally required to withhold taxes from each employee for that
state in addition to the employee's state of residence (or
Indiana, where they work), or are we covered as long as the
company is paying the state taxes?

Thank you so much for any help you can offer. This is a hotly
contested topic right now in our business, and as the new
payroll manager, I'm not sure where to turn.
 
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P

Paul Thomas, CPA

Hi! We are a small commercial diving company based in
Indiana. We send a team of 5 divers (employees, not
independent contractors) to various states for short periods
of time to perform services. The company for whom the work
was performed pays us the total invoice for labor and
materials, and then we pay our employees from our business
payroll account. Our business pays taxes to that state in
which the work was performed at the end of the year.

Are we legally required to withhold taxes from each employee
for that state in addition to the employee's state of residence
(or Indiana, where they work), or are we covered as long as the
company is paying the state taxes?



More than likely you will find that withholding must be done in each state
on the wages your employees earn in each state.

Start by contacting each state's tax withholding department to find out for
sure.

My best guess is that you would only be dealing with the withholding tax
issues, as your state of Indiana would handle any DOL claims for
unelmployment, workers comp, etc - but check on that as well while you have
them on the phone.





Thank you so much for any help you can offer. This is a hotly
contested topic right now in our business, and as the new
payroll manager, I'm not sure where to turn.


Well, states and localities are beefing up their enforcement of this type of
thing (payroll tax, sales tax, business licenses, etc) as they seek out more
funds to put in the tax coffers. Contractors are prime targets, as well as
service providers. It's an easy thing to check also, cross reference your
corporate return with the withholding reports, etc. If there are some, stop
looking. If there aren't any, then send out a notice.
 
K

Katie

Hi! We are a small commercial diving company based in
Indiana. We send a team of 5 divers (employees, not
independent contractors) to various states for short periods
of time to perform services. The company for whom the work
was performed pays us the total invoice for labor and
materials, and then we pay our employees from our business
payroll account. Our business pays taxes to that state in
which the work was performed at the end of the year. Are we
legally required to withhold taxes from each employee for that
state in addition to the employee's state of residence (or
Indiana, where they work), or are we covered as long as the
company is paying the state taxes?

Thank you so much for any help you can offer. This is a hotly
contested topic right now in our business, and as the new
payroll manager, I'm not sure where to turn.
 
K

Katie

Hi! We are a small commercial diving company based in
Indiana. We send a team of 5 divers (employees, not
independent contractors) to various states for short periods
of time to perform services. The company for whom the work
was performed pays us the total invoice for labor and
materials, and then we pay our employees from our business
payroll account. Our business pays taxes to that state in
which the work was performed at the end of the year. Are we
legally required to withhold taxes from each employee for that
state in addition to the employee's state of residence (or
Indiana, where they work), or are we covered as long as the
company is paying the state taxes?

Thank you so much for any help you can offer. This is a hotly
contested topic right now in our business, and as the new
payroll manager, I'm not sure where to turn.


Echoing Paul: Your employees are individual income taxpayers in every
state where they perform services on your behalf. In general, you
must register as an employer with each of those states and withhold
state income tax from your employees' wages and remit the tax to the
state where the employee worked. Whether or not your company
withholds or reports to the nonresident states, the employee remains
liable for the state's tax unless his or her services there are below
a statutory or administrative threshold, which is usually expressed in
terms of either days worked or dollars earned in the state. Many
states have no such "de minimis" rules, but at least theoretically
tax, and require withholding from, the first dollar earned by the
employee in the state. Also, frequently the de minimis threshold
applies to the employer's requirement to withhold but not necessarily
to the employee's responsibility to file and pay the tax.

I have told this story many times in this forum and elsewhere, but
once again: In the late 1980s I worked for one of the major
multinational accounting and consulting firms. The firm's consulting
arm had a large contract (an ERP installation, IIRC) with a client
headquartered in Denver. The firm had a number of fairly highly
compensated individuals, nonresidents of Colorado, working on this
contract for months at a stretch, and did not withhold Colorado state
or Denver local income tax from the nonresident employees' wages.
Somehow, perhaps through an audit of the client company, the Colorado
DOR became aware of this. There was talk of criminal prosecution of
the firm for failure to withhold. As you might imagine, the firm very
quickly got into compliance, and for the past 20 years I would venture
to guess that all of the larger multistate accounting, consulting, and
law firms have required their employees to report on their time sheets
not only the client for whom their services were performed, but also
WHERE the work was done. Many smaller firms, however, remain unaware
of their obligations.

There are exceptions, of course. Some pairs of states have reciprocal
agreements under which a resident of one state working in the other
owes tax only to the state of residence. An employee who is a
resident of one such state and works in another would not be subject
to tax in the state where the services were performed, and no
withholding would be required. Where there is no such reciprocal
agreement between the residence state and the source state, the
general rule is that the residence state allows the individual
taxpayer credit for the tax paid to the source state (the state where
the services were performed), so in general, the employer should
withhold for the source state and correspondingly reduce withholding
for the residence state. However, there are a few pairs of states
that stand in a reverse credit relationship whereby the source state
allows credit for the tax paid to the residence state; in that
situation, the employer should withhold for the source state only to
the extent that its withholding requirement is greater than the
resident state's for the same income and W-4 characteristics.

And of course there are a few states that do not impose individual
income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas,
Washington, and Wyoming. New Hampshire and Tennessee tax only
interest and dividend income of residents; they do not tax wages of
residents or nonresidents.

I know this is complicated, but it is important for both the company
and its employees to be in compliance. Paul's advice to contact each
of the states involved is excellent; that's a quick way to determine
whether the company needs to withhold and the employee needs to file
in each of the states.

Katie in San Diego

..
 
S

Steve Pope

Katie said:
Echoing Paul: Your employees are individual income taxpayers in every
state where they perform services on your behalf. In general, you
must register as an employer with each of those states and withhold
state income tax from your employees' wages and remit the tax to the
state where the employee worked.
There must be some threshold criteria here, because employers
do not pay out-of-state taxes every time they send an employee
on an interstate business trip.

I suppose in the case of the diving service example, an
entire contract is fulfilled by workers working out-of-state,
and so the remote state wants tax on it, just as if it
had been performed by an in-state contractor. I also
know professional athletes pay tax in each state worked.

Is there a formula by which one figures whether it's
an issue?

Steve
 
A

Alan

Katie said:
There are exceptions, of course. Some pairs of states have reciprocal
agreements under which a resident of one state working in the other
owes tax only to the state of residence. An employee who is a
resident of one such state and works in another would not be subject
to tax in the state where the services were performed, and no
withholding would be required. Where there is no such reciprocal
agreement between the residence state and the source state, the
general rule is that the residence state allows the individual
taxpayer credit for the tax paid to the source state (the state where
the services were performed), so in general, the employer should
withhold for the source state and correspondingly reduce withholding
for the residence state. However, there are a few pairs of states
that stand in a reverse credit relationship whereby the source state
allows credit for the tax paid to the residence state; in that
situation, the employer should withhold for the source state only to
the extent that its withholding requirement is greater than the
resident state's for the same income and W-4 characteristics.
For a listing of states with reciprocal agreements and links to
the necessary forms to complete, see:
 
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P

Paul Thomas, CPA

Steve Pope said:
There must be some threshold criteria here, because employers
do not pay out-of-state taxes every time they send an employee
on an interstate business trip.
Is there a formula by which one figures whether it's
an issue?


Unfortunately there isn't any generic solution. Each state sets floors on
nexus, so in NC it might be one day and you have to withhold tax, while in
UT it might be more than 4 days straight. And the impact on withholding,
sales and income tax may vary within each state, such that what might
trigger nexus for employee withholding might not be the same trigger for
sales tax or corporate income tax.

I suspect though, that you'll find that there are multiple scenarios that
would exempt trade show type workers who might be in state for a week at a
time once a year, but not for the sales guy who makes a regular monthly run
into another state to call on existing and potential customers.
 
K

Katie

There must be some threshold criteria here, because employers
do not pay out-of-state taxes every time they send an employee
on an interstate business trip.  

I suppose in the case of the diving service example, an
entire contract is fulfilled by workers working out-of-state,
and so the remote state wants tax on it, just as if it
had been performed by an in-state contractor.  I also
know professional athletes pay tax in each state worked.

Is there a formula by which one figures whether it's
an issue?

Steve

As I indicated, some states provide de minimis exceptions by statute
or regulation. These are generally expressed in terms of time (number
of days) or dollars (amount earned). Often the de minimis rules limit
the employer's obligation to withhold but do not specifically limit
the individual's liability for the tax. However, if the de minimis
exception applies for withholding purposes, generally the amounts are
so small that it is not worth the state's time and resources to pursue
the individual taxpayer.

No, there is no formula; it varies from state to state. Unfortunately
there is no solution to this problem other than to deal individually
with each state.

Katie in San Diego
 
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D

daysdreaming

Thank you for the discussion on my post. Looks like the best thing to
do is to contact the states. We do quite a bit of work in states with
which Indiana has reciprocity, but a few we do not. This gives me a
good starting point. :)
 

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