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Short-term employees, long-term payroll problems

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Do you have employees who live in one state and occasionally work in another? Well, both of those states can legally tax your employees and can require you to withhold those taxes, too. But maybe not in the future. A newly introduced piece of federal legislation could change all that.

H.R. 2315, the Mobile Workforce State Income Tax Simplification Act of 2015, introduced by Rep. Mike Bishop (R-Mich.), would ease state income tax withholding burdens on employers that send employees to work in another state for a short period of time.

How it works now

States will look for revenue anywhere they can. One huge jackpot is taxing nonresident employees—after all, they can’t vote in that state if they’re nonresidents—even if they’re in a state for a short period of time. Easy money, no tax increases....a perfect setup, except for those nonresident employees.

Take New York and New Jersey. These two states have been squabbling since before there was a Union. Let’s say you’re a New Jersey employer that occasionally sends employee Alex into New York for meetings a couple of times a month, but that’s it. Right now, if Alex spends more than 14 working days in New York, you have to withhold New York taxes.

Details of the legislation

If enacted, the law would limit withholding to the states of employees’ residence and the states within which they work for longer than 30 days during a calendar year.

You could rely on employees’ determinations of the time they expect to spend in a state in which they work, unless you have actual knowledge that employees’ determinations were fraudulent or you and your employees collude to evade state taxation.

Time and attendance records that track employees’ daily work activities would trump employees’ determinations, and you would be required to rely on those records, instead.

If enacted, the law would take effect on the Jan. 1 of the second year that begins after the date of the enactment.

The final word

Versions of this legislation have been introduced in previous Congress’ but have failed to pass. Nevertheless, we’ll keep our eye on it and report on its progress.

In a sign of progress, the House Judiciary Regulatory Reform, Commercial and Antitrust Law Subcommittee held a hearing on the bill on June 2. The reception was somewhat icy, with several witnesses worried about the impact on state revenues.

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