CCH can assist you with stories, including interviews with CCH subject experts.
Also, the 2013
CCH Whole Ball of Tax is available in print. Please
Visit the CCH Whole Ball of Tax site often as new releases and other updates will be posted
throughout the tax season.
CCH provides special CCH Tax Briefings on key topics at CCHGroup.com/Legislation.
2013 CCH Whole Ball of Tax
Being a Road Warrior Can Be Taxing, Says CCH
Federal Legislation Pending to Simplify Compliance, But Enactment Won’t Be Easy
(RIVERWOODS, ILL., January 2013) – For road warriors, it may not just be the miles that add up, but also the state tax returns. In fact, they may owe income taxes to all the states they’ve worked in over the past year, according to CCH, a Wolters Kluwer business and a leading global provider of tax, accounting and audit information, software and services (CCHGroup.com).
“States have regularly sought income taxes from professional athletes and entertainers working in their state, but income tax rules also apply to other nonresident workers who cross state borders,” said CCH State Tax Analyst Kathleen Thies, JD.
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.
Thies warns this may leave employees facing penalties.
“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.”
Below, CCH highlights the current rules as well as 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.
- 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; and
- Massachusetts has different income filing thresholds for residents vs. nonresidents. Namely, the 2012 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 Thies.
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 last May, the Mobile Workforce State Income Tax Simplification Act of 2012, 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. Last October, more than 200 organizations signed a letter to Senate Majority Leader Harry Reid urging the Senate to take up the bill.
“This law would make it easier for employers and employees to understand and comply with withholding and filing rules,” said Thies. “However, states will likely challenge any federal legislation setting guidelines related to state income tax, so it could be an uphill battle.”
Additionally, Thies noted that 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 2012 and 2013 Filing Seasons
Given that no federal legislation is 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 Thies.
“Employees also need to be aware to follow up with their employer if they don’t think taxes were withheld accurately for 2012 to get it cleared up and also to make sure it’s correct for 2013,” said Thies.
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.
About CCH, a Wolters Kluwer business
CCH, a Wolters Kluwer business (CCHGroup.com) is a leading global provider of tax, accounting and audit information, software and services. Celebrating its 100th anniversary in 2013, CCH has served tax, accounting and business professionals since 1913. Among its market-leading solutions are the ProSystem fx® Suite, CCH Integrator™, CCH® IntelliConnect®, Accounting Research Manager® and the U.S. Master Tax Guide®. 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. Its shares are quoted on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.
-- ### --