Employees get compensated in various ways including base salary, bonus pay-outs, and equity awards, all of which require and experience varying methods of wage reporting and taxation. The payroll tax reporting processes, dictated by an organization’s large geographic footprint, are more complex. In light of this, the job of accurately tracking and taxing mobile employees can quickly become onerous and technically complex.
With a web of complex rules governing state wage reporting and income tax withholding, including de minimis thresholds, reciprocal relationships, and specific reporting methodologies, it may come as no surprise that many employers have been unable to effectively comply with reporting and withholding rules on a state-by-state basis. Layer onto that the rise in tele-commuters and work-at-home employees, and an organization’s employment tax requirements expand considerably.
To better understand current business attitudes and actions taken with respect to nonresident taxation in the United States, KPMG LLP’s (KPMG) Global Mobility Services practice teamed with the American Payroll Association to conduct a survey of tax/payroll professionals across a range of industries, organization types, and sizes.1 The survey results provide an in-depth look at corporate “reaction” of over 1,300 participating organizations. Concluded in August 2018, the survey assessed what organizations’ primary concerns are and how they are addressing nonresident taxation with respect to short-term business travel.
This article will review the objectives, findings, and trends that were identified as part of this survey. Further, since a similar survey was completed in November of 2014, comparative findings are also discussed, where applicable.
Context: Employees are travelling
To set the stage for our discussion, one key point from the 2018 survey is that organizations are well aware that business travel is happening, both domestically and internationally.
- Almost 71 % of respondents had at least some employees traveling outside of their U.S. home market regularly.
- Almost 60 percent of organizations had employees working in up to 10 states during a calendar year.
- Almost 12 percent of employees were deemed to travel regularly in excess of 10 days per year.
- Globally, 34 percent traveled up to 10 days outside their home market and only 4 percent traveled more than 10 days outside their home market.
With so many employees on the go, is nonresident withholding/reporting viewed as an issue?
Contending with employees moving around the globe and within a single country from state to state (or province to province) is engendering a host of tracking, withholding, and compliance issues for employers. Let’s look at the question of whether—and how—employers see this as an issue.
Based upon the survey results, 48 percent of the participants indicated that U.S. state-to-state nonresident withholding and reporting are either currently a major issue or a growing concern for their organization. When reviewed in the global context, almost 26 percent of respondents viewed this as a major or growing issue on an international basis as well, with about 27 percent of the respondent population tracking compliance globally.
One trend identified is that the number of days that employees are traveling for business appears to be decreasing. In 2014, 37 percent of respondents indicated that their traveling population visited multiple states in excess of 10 days per year, compared to about 12 percent in the 2018 survey. Globally, the 2014 survey reflected international travel in excess of 10 days for 10 percent of their population, while the current survey reflects such travel at only about 3.5 percent.
KPMG Comment: Companies are looking for cost-efficient alternative methods to business travel. In some cases, companies will compare the cost of implementing, for example, video conferencing to the combined cost of travel (airfare, hotel, meals, etc.) and company compliance with tax withholding requirements.
Drop in Level of Concern Regarding Travel (U.S. versus Global)
While travelling employees are still a significant concern to employers, by comparison to the 2014 survey, the level of concern with respect to travel seems to have dropped somewhat significantly. The prior survey indicated that 60 percent of respondents had concerns with respect to U.S. travel, while 33 percent of respondents expressed global concerns as opposed to 48 percent and 26 percent respectively in the current survey. It is important to note, however, that the number of employers with internal controls in place (at some level) to track/monitor mobile employment has increased by about 12 percent.
KPMG Comment: While this is still a significant area of concern for employers, the fact that more employers are putting the necessary internal controls in place may be a contributing factor to the reduction in the level of concern noted.
Audits create concern, spur action
The absence of, or inadequate, controls in the area of nonresident withholding can result in thorny business issues for organizations with mobile workforces. Audits of employers in some states and countries can specifically target this item for review, with the results—should they turn something up—ranging from a financial cost to a reputational impact that could come from any adverse publicity.
In the event of an audit with respect to state income tax withholding, auditors will usually review data that companies have on record, including employees’ work states and resident states within the company’s internal Human Resource records, travel records or expense reports, and all earnings during the audit period. Taken in the aggregate, the employee travel and business footprint is then used by auditors to identify potential non-compliance and calculate assessments, usually inclusive of tax, penalties, and interest. These assessments are highly dependent upon the number of days that nonresident employees perform services in the audit jurisdiction and the amount of wages that employees earn when performing those services.
In addition, since most states require withholding on all compensation earned in their jurisdiction, pay-outs in the form of bonuses or equity compensation taxed in a primary work state and not allocated to a “travel-to” state can result in additional exposure in the event of a nonresident withholding audit.
As a prime example, the New York State Department of Taxation and Finance has been actively pursuing audits in the area of nonresident withholding since at least 2005. These audits can be extremely time consuming for employers, and often result in broad assessments based upon data gathered from the employer and its various vendors and providers. These initial assessments are often based on global payroll data, irrespective of verified time spent by employees performing services in New York. In several cases, the initial assessments were ultimately reduced significantly as a result of specific data gathering; in one extreme instance that we know about, an assessment dropped from $160 million to $16 million as a result of detailed follow-up. In addition to post-assessment analysis, implementing a compliance program can help mitigate exposure and reflect a positive intent to comply with nonresident withholding requirements.
Ultimately, nonresident withholding is an organizational-level responsibility, with potential officer and board-level ramifications in the event of systemic failures being identified. While just over 9 percent of survey respondents have indicated they have experienced a state withholding audit or review, which is consistent with our 2014 survey, almost all are aware of the audit risk.
Post-Audit Ramifications and Impact on Compliance
Settling assessments can impact the entire organization. Finance departments are usually involved for funding the payment, but depending upon the materiality of the assessment, C-Suite executives might be involved. The fall-out from settling a nonresident withholding audit could be felt company-wide.
Post-audit compliance typically includes implementing new policies and procedures or tightening existing ones in an effort to increase internal controls.
Multiple departments will be stakeholders, both initially and prospectively, for implementing and maintaining the nonresident withholding solution. Stakeholders include C-Suite executives who will make decisions, payroll/IT and Human Resource departments that will provide input and formulate implementation requirements, and in-house tax/finance groups that will provide oversight and planning for potential corporate tax implications. Moreover, change management communications will be extremely important. It is crucial, therefore, for all to be involved at the initial planning stage to provide input, to understand and agree objectives, to assign roles and responsibilities, and to get buy-in, and, of course, to set a realistic timeline for “go-live.”
Usually there is a large “change management” strategy that takes months to develop and deliver on, inclusive of communications to the employees, associated trainings, etc., given that traveling employees will be adjusting to reporting travel to nonresident states under the new or revamped policies and procedures. Payroll, Human Resource, and possibly internal audit personnel are enforcing these policies. Further, educating affected employees about the new requirements and potential personal income tax impact should be carefully considered, as should the company response to questions that will surely be posed related to increased state taxation, extra time-keeping needs, and additional tax return requirements.
Impact of internal controls
The creation of internal processes and procedures to assert effective control of a mobile workforce can be very complicated and fraught with pitfalls, with many matters to consider such as how to physically identify when and where employees are traveling, how to properly tax all types of compensation (as previously discussed), and who will bear the costs of any additional tax.
Of the employers surveyed, 50 percent of respondent organizations currently do not have any processes/procedures in place to track where employees are performing services and to tax properly based on work location. Interestingly, of those organizations that indicated they do not have processes/procedures in place, 60 percent of them do not anticipate formulating a program in the near future. And yet recall that earlier we had noted 48 percent of the participants indicated that U.S. state-to-state nonresident withholding and reporting are either currently a major issue or a growing concern for their organization.
KPMG Comment: Given the current landscape wherein only a handful of jurisdictions seem to actively audit and assess companies for inadequate nonresident withholding, coupled with the complexities of policy implementation, it may not be surprising that noncompliance is sometimes the norm. In addition, targeted compliance—for example in “high travel” states or “active auditing” states—is becoming more common as companies lean towards coming into some compliance in this space, even if total compliance may be seen as unfeasible.
Determining if there is an issue
Even if a company has not been subject to a nonresident withholding audit that revealed procedural gaps and resulted in an assessment for non-compliance as discussed above, employers should exercise vigilance and regularly assess their situation by reviewing information they have on record to determine in which jurisdictions exposure might exist and to quantify that exposure. Typically this could include reviewing travel records to identify the number of days that employees are performing services in nonresident jurisdictions in conjunction with employee earnings data. Based upon the amount of untracked time employees spent performing services in nonresident jurisdictions, a company could estimate the under-reported and unpaid taxes (and penalties/interest) for those jurisdictions. This information could serve as a catalyst to create new policies and procedures to be enforced prospectively and/or mitigate prior-year exposure amounts through voluntary disclosure agreements with nonresident jurisdictions, if applicable.
Q1. Is U.S. nonresident state withholding/ reporting or business travelers a major or growing issue for your organization with resepect to compliance and/or risk?
Q2. Is global nonresident withholding/reporting or business travelers a major or growing issue for your organization with respect to compliance and/or risk?
Q3. Do you currently have procedures in place to monitor your U.S. or global short-term business travelers and remit/report taes acccordingly?
Q4. If your organization has not implemented U.S. state tracking and taxing compliance policies and procedures, do you anticipate implementing such a program in the next:
Q5. With respect to those U.S. employees who travel outside their home work location more than 10 work days a year, approximately how many states do you estimate they work in during a given year?
Q6. With respect to those U.S. employees who travel outside their home work location more than 10 work days a year, approximately how many countries do you estimate they work in during a given year?
Q7. Has your organization been audited or under review from any U.S. state or local jurisdiction with respect to nonresident withholding/reporting compliance?
Q8. Does your organization currently, or expect to, provide financial/tax support to employees working in multiple U.S. jurisdictions?
Q9. Would you consider tracking your employees, solely for work location, by GPS via their mobile phone?
Q10. With respect to your U.S.-based employee population, do you anticipate your telecommuting/work-from-home workforce to grow over the next 5 years?
Q11. If you have a program to track and tax employee travel currently in place or under development, what employee population is in the program?
Q12. What type of organization are you?
Q13. If you have implemented multistate income tax withholding, do you currently:
Q14. What type of organization are you?
Q15. Approximately how many total employees (U.S. and Global) does your organization have?
Q16. Of those employees, how many are U.S. based?
|Aerospace & Defense||0.91%||10|
|Automotive Manufacturers & Suppliers||1.00%||11|
|Banking & Finance||6.76%||74|
|Building & Construction||4.29%||47|
|Conglomerates, Engineering & Industrial Products, Metals||1.74%||19|
|Electronics, Software and Business Services||4.66%||51|
|Energy & Natural Resources||1.74%||19|
|Food, Drink & Consumer Goods||4.02%||44|
|Healthcare for profit||4.93%||54|
|501(c)(3) not-for-profit charitable organization||2.10%||23|
|501(c)(3) religious organization||0.55%||6|
|Oil & Gas||1.74%||19|
|Power & Utilities||2.01%||22|
There are a few “stand outs” in the survey that point to how organizations intend to do things differently or are thinking differently in terms of the way forward.
- Overall, almost 32 percent of the organizations without a program in place are anticipating implementing controls around nonresident taxation.
KPMG Comment: The desire to act in compliance and prevent undue exposure to risk is probably driving this. The realization that mobile workforces are evolving and becoming more varied, and acknowledging the need to exercise some degree of effective control over these employees before matters get out of hand or unwieldy, may also be motivating factors.
- Also noted was that almost 84 percent of the organizations surveyed were not planning on providing employee-level assistance for additional state withholding, either in the form of additional compensation to employees to cover nonresident taxes when nonresident states have higher tax rates than the employee’s resident state or in the form of tax preparation assistance, up from 80 percent in the prior survey.
KPMG Comment: In practice, we see companies take the position that multi-state wage reporting and withholding is the law, and employees and employers are both required to comply. As such, employers are not providing an economic benefit for either additional non-resident taxes or the cost of tax preparation to the employee for required compliance. Although not all states allow for non-resident tax credits, and each employees’ personal income tax situation will vary, in theory, most employees should either receive a refund or an offset of taxes on their resident personal tax returns from non-resident taxes withheld and remitted in excess of their resident state’s tax rate.
- One other interesting question posed was to what extent organizations would consider utilizing some type of “GPS” system in tracking mobile employees for tax purposes—almost 21 percent of respondents indicated they would consider such a methodology, down from 26 percent in the prior survey.
KPMG Comment: While companies often want to know that GPS tracking is available as an option to help with multi-state withholding compliance, at the same time they are hesitant to implement it for a variety of reasons, including, of course, privacy.
Observations about the Survey and Its Participants
- Organizational size—One observation in light of the demographics of those organizations that participated in the survey is that organizational size minimally impacted the survey results. Thirty-one percent of respondents were organizations with over 5,000 employees, while almost 20 percent had in excess of 10,000 employees. The results of the various questions posed for those specific demographics generally mirrored the overall findings, indicating that this issue cuts across companies of all sizes.
- Tele-commuters—In response to the overall workforce shifts experienced by many employers, we added an additional survey question this year with respect to tele-commuters. When asked if they expected their tele-commuting/work-from-home population to grow over the next five years, 64 percent indicate they do anticipate an increase in work-from-home employees.
KPMG Comment: While tele-commuting could change many organizations’ future outlook on mobility, if employees are working in a resident state that is different from the state where their primary office is located, it could also result in even more complex state tax reporting concerns. As these situations arise, payroll departments will need to grapple with other aspects of taxation, such as corporate tax nexus or state unemployment insurance tax sourcing issues, related to those tele-commuters’ resident locations and the amount of time that the employees are performing services as a tele-commuter.
Conclusion - Tongue twister or quantum leap or both?
The primary objective of this survey was to gather information from organizations, assess it, benchmark with respect to multi-state and global withholding on the compensation of mobile employees, so we could answer the question often posed: “What is everyone else doing?”
As tax professionals, we are often asked to assist with defining this issue, to help develop ongoing controls, and to advise in the event of audits by state taxing authorities. Generally, what we see is the overlapping complexities tied to the various company stakeholders which can make effective solutions difficult to formulate and implement. The survey clearly shows that although there is an understanding of the employment tax compliance requirements inherent with a mobile workforce, there is still the larger question of what the appropriate solution is (or solutions are) to the attendant issues. In many organizations, there is not necessarily another business need to track employee work travel other than for taxation, which further complicates the non-tax aspects of the issue and the immediacy of a solution.
By reviewing the 2018 survey results, as well as the results from the 2014 survey, and attempting to develop a future-state theme, the data indicate that some organizations would like to come into compliance in this area over the next few years. Roughly 19 percent of respondents stated that they anticipated implementing a program within the next 12 to 24 months. In addition, the survey results indicate that almost 50 percent of respondents view multi-state withholding as a major or growing issue.
With business travel continuing to increase—and let’s not forget the growth of tele-commuting—increasing regulatory burdens, and more intense scrutiny from the tax authorities, organizations may wish to identify and implement appropriate methodologies and technology to successfully address their nonresident withholding issues and maintain compliance as required. Procrastination or doing nothing could bring penalties and other additional costs, unwanted attention and publicity, and unhappy employees.
- See: KPMG LLP's Employment Tax Practice's Multi-state Nonresident Withholding Survey Report (2018).