Short-term domestic business travelers often have a need to travel outside their home tax jurisdiction. For example, there may be a business conference, corporate training, team gathering, or a customer meeting in another state.
Do clients really need to think about the tax requirements in other states?
GMS spoke with Erika Beddow, Business Development Manager at Global Mobility Tax, LLP (GMT). Erika has 20 years’ experience in public accounting and in the Global Mobility industry. Erika agreed to share her expert guidance on this issue.
For Short-Term Domestic Business Travelers, Do Clients Need to Consider Other State Tax Requirements?
Quick Answer: Yes
When asked if clients need to think about taxes in other states for their short-term domestic business travelers, Erika quickly answered “Yes.” She notes that because each state taxes differently, short-term domestic business travelers should be reviewed to determine at what point tax is triggered in each state based on the travelers’ itinerary.
Business travelers are individuals who travel at the request of their employer to either visit clients, customers, work on projects, or who attend meetings or conferences. Unlike expatriates or assignees, these employees are typically not tracked by Human Resources or covered under an assignment policy.
Business travelers receive compensation from the home employer, such as per diems, expense reimbursements, accommodations, meals, and other incidentals. They will not cease residency in their home states and family members typically do not travel with them.
Erika notes that GMT assists clients in determining the potential reporting and tax requirements in each locality. The firm also assists clients with assessing the risks of non-compliance.
What are the Compliance Issues Related to Short-Term Domestic Business Travelers?
Erika shared that each state has their own tax laws and these laws typically differ from state to state. With today’s technology, many state tax auditors can focus on companies with a mobile workforce more easily and enforce their jurisdiction’s tax laws.
Why is this important? According to Erika, the jurisdiction where the services are performed is the jurisdiction that has the first right to tax the income earned in their jurisdiction.
Some issues that may arise when employees are working in other states outside their resident state:
- Employers are required, in most states, to allocate the income related to the employee’s travel and report and withhold tax accordingly.
- Employers will need to analyze if the employee’s travel to any state has triggered any corporate tax issues (i.e. Nexus).
- The employee could have income tax obligations in the other states where they worked.
How do Companies Fall out of Compliance with Short-Term Domestic Business Travelers?
Many companies may be already be doing this, but a significant number are not. A company could be non-compliant if they are not reporting the income in the other state and the appropriate tax is not withheld. In turn, the employee could be non-compliant by not filing and paying taxes in the other state.
What are the Risks Associated with Non-Compliance?
Erika believes many states are actively looking for ways to increase their revenues. One way of doing this is by trying to collect from nonresident short-term domestic business travelers. If a state auditor becomes aware of business travelers, the auditor can initiate a payroll audit to ensure the company has withheld and reported the proper income tax. Non-compliance with statutory reporting and tax requirements can result in tax assessments to the company and employee, including fines and penalties. These additional costs are usually unexpected and can cause business interruptions, reputational risk for the business, and employee dissatisfaction.
Companies should keep track of their employees who continue to work outside of their resident state. It is also becoming increasingly important that companies monitor and track their employee’s business travel to ensure they are compliant with all tax and reporting requirements.
How does GMT Help Clients Identify Their Specific Risks?
GMT is ready to assist clients that have mobility programs in becoming or staying compliant. GMT can help them identify and quantify the risks of payroll non-compliance. Clients should put an action plan into place to address these issues.
Action Plan for Short-Term Domestic Business Travelers
Erika recommends clients develop a Business Traveler Tax Policy to provide program managers and employees with clear guidance and procedures. The experts at GMT can assist companies in developing a policy that will help them mitigate risks, determine payroll and reporting requirements for each state, and determine what level of assistance, if any, they should provide to the employee. Erika notes that a tax policy should include:
- Clear definitions of who is covered
- Accurate regulations for tracking travel and workdays in each location
- Established process to initiate and analyze tax and reporting obligations
- Tax gross-up process and policy
- Specific tax services the employer will provide to the employee
The Business Traveler Tax Policy can stand on its own or be part of the company’s relocation policy. A tax policy will ensure that both the company and employee understand their obligations ensuring a positive employee experience.
Employers should note that the employee working in other states may have additional tax liabilities in these other states and this will require them to file tax returns accordingly. Income tax rates vary from state to state, and this can cause an increased tax burden to the employee. Erika notes that the employer will need to determine if they need to apply additional tax gross-ups or tax assistance for these employees.
What Types of Reports are Available, in What Format, to Support the Action Plan?
Erika shared that there are many different types of reports are available for tracking purposes, and these reports may be manual or automated. However, GMT suggests using an automated process. There are many ways to automate travel tracking either internally or externally. One recommendation is to use either an internal program or a travel calendar app. By reviewing the short-term domestic business travelers, clients can plan accordingly to mitigate potential risk and exposure in other states for both the employers and employee.
Automated processes offer many benefits, including:
- Increased Accuracy
- Elimination of Unnecessary Processes
The team at GMT has helped clients with these issues for over 17 years. GMT provides expert tax support, education, and awareness to clients and their employees in order to ensure corporate compliance and employee satisfaction. GMT has a quick guide in PDF form for employers to help them understand some of the tax issues surrounding short-term domestic business travelers.
Erika says she is always ready to meet to help employers learn more about being compliant and building internal processes to support their mobile workforce.
GMS’ team of domestic relocation experts has helped thousands of our clients learn about important issues such as tax compliance for their organization. Our mobility consulting team can help your company understand how to identify and mitigate the issues surrounding tax compliance for short-term domestic business travelers with the assistance of the experts at Global Mobility Tax, LLP.
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Learn more about tax compliance issues for short-term domestic business travelers. Contact our experts online or give us a call at 800.617.1904 or 480.922.0700 today.