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Frequent Business Travelers Can Expect Many, If Not Happy Returns: Wolters Kluwer, CCH Examines Tax Rules for Road Warriors
(RIVERWOODS, ILL., January 2014) – Although paperless options are growing in popularity, those who regularly rack up frequent flier miles for business travel or hit the road to cover territories still need to collect and prepare tax returns from many states where they’ve worked over the past year. And despite calls to simplify the process through federal legislation, road warriors must make sure they file all required state tax returns in addition to their federal Form 1040s. CCH, a part of Wolters Kluwer and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com), reviews what business travelers need to know for tax season.
“It’s not just the professional athletes and entertainers who are required to file state income tax returns,” said Wolters Kluwer, CCH State Tax Analyst, Sandy Weiner, JD. “Income tax rules also apply to other nonresident workers who cross state borders, even if only working for a short period of time.”
While employers should be withholding the required amount, it can be very difficult to keep track of the varying rules for each state or to determine where employees are performing the work if the company has not set up effective tracking.
“Many workers are unaware of the rules, but ultimately, they are the ones responsible for paying taxes. So regardless of whether or not your employer is withholding the correct amount, you are still required to report your income to the appropriate state revenue departments,” Weiner added.
Wolters Kluwer, CCH highlights the current rules as well as proposed federal legislation that seeks to streamline compliance.
Working Across State Borders
Currently, 41 states impose a personal income tax on wages, and each has different rules regarding when income tax is imposed on nonresidents. Some state withholding thresholds are based on the number of days worked in the state while others are based on the wages earned in the state. For example:
- Louisiana requires nonresidents who must file a federal return to also file a Louisiana state tax return if they received income from state sources.
- Maine requires nonresidents to file a state tax return if they have enough income from state sources to trigger a state income tax liability, but there are exceptions based on the number of days spent in the state, the type of work and the amount earned.
- Massachusetts has different income filing thresholds for residents vs. nonresidents. Namely, the 2013 filing threshold is $8,000 for residents regardless of filing status; however, the threshold for nonresident single filers is just $4,400; $6,800 for head of households; and $8,800 for marrieds filing jointly.
Most states require residents to file income tax returns reporting all their income, regardless of whether they earned the income in that state or another state. An employee working in multiple states would then also file nonresident income tax returns in each state in which they met the income tax filing thresholds. Helping to avoid double taxation, most states allow residents to take a tax credit on their tax return for income taxes they paid to other states.
Some states also have reciprocity agreements allowing individuals to work in neighboring states without owing income taxes to the nonresident state. Overall, more than one-third of states have reciprocity agreements with one or more other states, including:
- Illinois: Residents of Iowa, Kentucky, Michigan or Wisconsin who work in Illinois do not have to pay Illinois income taxes on their wages;
- Ohio: Residents of Indiana, Kentucky, Michigan, Pennsylvania or West Virginia who work in Ohio do not have to pay Ohio income taxes on their wages; and
- Pennsylvania: Residents of Indiana, Maryland, New Jersey, Ohio, Virginia or West Virginia who work in Pennsylvania do not have to pay Pennsylvania income taxes on their wages.
“Typically, reciprocity agreements are between adjacent states, so they don’t apply when workers are crisscrossing the country,” said Weiner.
An exception is the District of Columbia, which does not require residents of any state to pay District of Columbia income taxes on their wages, unless they lived in the District of Columbia for at least 183 days during the year. Most states also have special rules exempting members of the military and their families from having to file multiple state tax returns.
Conspicuously absent from the states providing one another reciprocity are New York, Connecticut and New Jersey. As a result, workers who live in one of these states and work in another have to file nonresident income tax returns if they meet the filing thresholds. They can, however, take a tax credit for taxes paid to the other state.
Federal Mobile Workforce Legislation Would Simplify, But State Resistance Expected
In response to the complexity, many businesses are supporting federal legislation that seeks to streamline the rules. Passed by the House of Representatives in 2012, the Mobile Workforce State Income Tax Simplification Act, if enacted, would require that a nonresident employee would have to be present and working in a state for more than 30 days during the year before the state could tax his or her wages. The Act would not apply to professional athletes, professional entertainers or certain public figures.
Furthermore, the legislation only applies to employees, not independent contractors. As a result, independent contractors would continue to be subject to the varying state rules.
Impact for 2013 Filing Season
Because there’s still no federal legislation in place, employees and employers need to make sure they’re following the various rules of all the states. As states continue to look for more revenue sources, businesses may also start to see more payroll audits seeking to determine where employees are performing their work.
“Auditors may look more closely at reimbursed travel expenses, particularly for higher income earners, and then look to see if the company has been withholding income for employees in the locations they’ve been traveling to,” said Weiner.
In addition to employment income, other reasons a taxpayer may need to file a nonresident state income tax return include receiving income from:
- A share of a partnership, LLC or S-corporation based in another state;
- A trade or business in another state, such as working as a consultant or a repairman;
- Rental property in another state;
- The sale of real estate in another state; and
- Lottery or other gambling winnings from another state.
CCH, a part of Wolters Kluwer
CCH, a part of Wolters Kluwer (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. It has served tax, accounting and business professionals since 1913. CCH is based in Riverwoods, Ill. Follow us on Twitter @CCHMediaHelp. Wolters Kluwer (www.wolterskluwer.com) is a market-leading global information services company. Wolters Kluwer is headquartered in Alphen aan den Rijn, the Netherlands.