Posted by Lorraine Cohen and John Jennings on May 29, 2014
A long-standing, widely known — but sometimes ignored — tax requirement calls for income tax to be paid to the jurisdiction where work is actually performed. So, organizations with employees who travel to other states or other countries for business purposes should, in most cases, be tracking their employee’s travel in order to remit taxes to those locations where compensation reporting and withholding is required. (Requirements vary in a few states and, by country, according to treaty policies.) Even if employers fail to withhold and remit the required taxes, employees themselves are obligated to do so. With taxing authorities paying more attention to this requirement, and with the potential (and precedence) to incur substantial penalties for noncompliance, organizations would be wise to evaluate their current practices and remediate any shortfalls — the sooner the better.
Why the urgency? Looking to boost tax revenues, taxing authorities have become more vigilant about enforcing the law and are starting to apply more sophisticated technology tools to detect and monitor who is working within their jurisdictions and for how long. Rather than tracking down individual employees, a more common practice has been for the taxing authority to address the collection issue directly with employers. As a result, employers who fail to comply face higher risk exposure than they have previously, prompting many to address the issue for the first time. As you might imagine, however, performing the necessary tracking, withholding, and reporting can be a daunting task, particularly for large global enterprises that might have thousands of employees working outside their home jurisdictions at various time during the year.
This is a situation well suited for applying workforce analytics. Using commonly existing data sources — such as travel records, expense reports, security badge scans, and the like — it’s possible to determine who is working where, when, and for how long. This information can then be used to calculate the appropriate taxes owed, and be fed into payroll systems to trigger the required withholding and reporting. An added benefit is that such systems can be configured to function behind the scenes, without requiring special effort or interaction from employees to, for example, enter data about their travel.
Companies we’ve been working with to implement an analytics-based approach also report other helpful benefits stemming from their ability to track employee travel and location data, such as:
While HR typically takes the lead in driving compliance efforts for travelers, other functions such as tax, legal, and internal audit may also have a stake in the effort, particularly because of the need to establish policies on how reimbursements will be handled. For example, will the employer reimburse the employee for the amount of any taxes owed? Or will the employee be responsible for paying the tax? What happens if employees live in a state with no income tax, but then face having to pay taxes to another state? How might taxation affect business travel or project cost estimates and budgets? Having the buy-in and support of the necessary parties within the organization to consider the implications, set and communicate policies, and establish data collection and tax remittance procedures will help smooth the path to compliance.
A bill currently in committee in Congress (since March 2013) seeks to impose a 30-day threshold before states can collect taxes on non-residents working in their state. As of the time of this post, the bill stands a 50% chance of passing. (See H.R. 1129: Mobile Workforce State Income Tax Simplification Act of 2013.) However it should be noted that two previous bills on the topic failed to pass, so organizations should not be counting on legislation to clarify and help ease some of their tax and administrative burden.
Instead, given recent stepped-up enforcement and the risk of substantial noncompliance penalties, organizations should focus on meeting business traveler taxation requirements efficiently and effectively. Using workforce analytics to leverage existing data sources is helping many organizations do just that — a great example of how Big Data can help meet a big challenge.
|Lorraine Cohen is a partner in the Global Employer Services practice for Deloitte Tax LLP. She has over 25 years of experience providing services to global companies, including expatriate tax program management consulting and compliance, tax planning, and human resource policy consulting.|
|John Jennings is a partner in the Global Employer Services practice for Deloitte Tax LLP. He has helped multinational organizations address the HR and tax challenges of transferring personnel and compensation plans across borders, and has assisted corporations with the various facets of their global compensation programs.|
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.