The U.S. House of Representatives passed H.R. 2315, the Mobile Workforce State Income Tax Simplification Act of 2015 (“Mobile Workforce Act” or “Act”), on September 21, 2016. The Senate received the House-approved bill on September 22, 2016, and its ultimate fate remains unclear.
The Mobile Workforce Act would permit employees to work in a state for a 30-day period without incurring nonresident personal income tax on the wages earned in connection with their employment in such state. The Act further establishes a 30-day safe harbor for purposes of an employer’s income tax withholding and reporting obligations as wages not subject to personal income tax are not subject to withholding (i.e., employers do not have to withhold state income tax for an employee unless the employee’s presence in the state exceeds the 30-day safe harbor).
Currently, employers and employees are forced to navigate a complex patchwork of state withholding and reporting requirements to comply with states’ laws. The Mobile Workforce Act greatly simplifies the current landscape for both parties.
The Mobile Workforce Act states that “[n]o part of the wages or other remuneration earned by an employee who performs employment duties in more than one State shall be subject to income tax in any State other than (1) the State of the employee’s residence; and (2) the State within which the employee is present and performing employment duties for more than 30 days during the calendar year in which the wages or other remuneration is earned.” Employers are also not required to withhold on employee wages unless the employee’s presence in a state exceeds 30 days. The 30-day safe harbor set forth above does not apply to wages earned by professional athletes, professional entertainers, and certain public figures. Although a few states currently have other forms of safe harbors with respect to an employer’s wage withholding on nonresidents who work in the state on a limited basis, such laws are not uniform and frequently present problems for traveling employees and their employers. Additionally, many states provide no minimum threshold as to when an employee is required to remit personal income tax, and some states may argue that personal income tax is due the moment income is earned in the state. This 30-day threshold seeks to alleviate some of these issues for both employers and employees.
The Act further provides a safe harbor for purposes of determining penalties on employers relating to their withholding and reporting requirements. Specifically, the Act permits an employer to rely on an employee’s “annual determination of time expected to be spent” in the states in which the employee performs employment duties. The above safe harbor does not apply if (1) the employer has “actual knowledge of fraud by the employee in making the determination;” or (2) the employer and employee collude to evade tax. Notably, records maintained by an employer in the regular course of business that record an employee’s location do not preclude the employer from relying on the above safe harbor; however, if an employer maintains a time and attendance system that tracks the employee’s daily whereabouts and duties performed, the data from such system will be used instead of the employee’s determination.
Many taxpayers are cautiously optimistic about the passage of the Act in the Senate. State support will likely vary depending on each state’s laws on this issue. For example, New York currently provides a 14-day safe harbor before employers must withhold tax, so passage of the Mobile Workforce Act would likely decrease state revenue. The Congressional Budget Office stated that New York “would probably lose…between $50 million and $125 million per year, according to state and industry estimates.” However, regardless of the revenue impact, the Mobile Workforce Act would provide much needed clarity to states, employers, and employees regarding the income that can and cannot be taxed by the states.