Workshop JJ Challenging Employment Taxes - MEC Seminars & Conferences
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Workshop JJ
Challenging Employment Taxes
… Payroll, Fringe Benefits
and Your Nightmare -
Travelers and Telecommuters
Wednesday, January 29, 2020
11 a.m. to 12:30 p.m.
PRIVATE SECTOR EXPERIENCE
Current
• Principal, Ryan, San Jose office
─ Specializes in leading and advising organizations in the areas of human
capital taxation, including financial and operational risk management,
process improvement, and strategic management. Skilled at representing
clients before state and federal agencies during employment tax audits or
controversy.
• Practice Leader, Human Capital Tax, Ryan, San Jose office
─ Responsible for the development of Ryan’s Human Capital Tax practice.
MINDY MAYO Previous
Principal • Director, Human Capital Tax, Ryan, San Jose office
mindy.mayo@ryan.com • Director, Employment Tax Practice, national accounting firm
408.850.4565 • Owner, consulting firm
• Senior Tax Manager, State and Local Tax, national accounting firm
PUBLIC SECTOR EXPERIENCE
Previous
• Tax Auditor IV, State of California, Employment Development Department
─ Responsible for performing services as a Hearing Specialist before the
California Unemployment Insurance Appeals Board.
PUBLIC PRESENTATIONS
Ms. Mayo is an accomplished public speaker and has achieved broad industry
recognition for strategic thought leadership on various human capital taxation
matters.
PROFESSIONAL AFFILIATIONS
• American Payroll Association
• Catholic Professionals and Business Club
EDUCATION/ACCREDITATION
• Bachelor of Science Degree, Accounting, San Jose State University
• Certified Payroll Professional (CPP)
CHALLENGING EMPLOYMENT TAXES - PAYROLL, FRINGE BENEFITS AND YOUR NIGHTMARE…TRAVELERS AND TELECOMMUTERS Mindy Mayo, Ryan LLC Human Capital Tax January 2020
Agenda
• Withholding and Payroll Tax Issues
• Nexus and Telecommuting
• Fringe Benefits
• Stock Options
• Meals and Entertainment
• Transportation
1
WITHHOLDING AND PAYROLL TAX ISSUES
Employer Withholding
• Generally, states require employers to withhold personal income
taxes on behalf of their employees.
• Employer withholding requirements differ widely among the states.
According to the Mobile Workforce Coalition:
• Thresholds based on days
• Arizona, Hawaii (60 days); Connecticut (15 days); New York (14
days); Maine (12 days)
• Thresholds based on in-state wages
• Wisconsin ($1,500); Idaho ($1,000); South Carolina ($800);
Oklahoma ($300)
• California (above low-income exemption); Oregon (equal/above
employee’s standard deduction)
• Many states have no thresholds (e.g., require withholding on first
dollar earned or first day worked in State)
• Examples: Colorado, Indiana, Massachusetts, Maryland,
Michigan, North Carolina, Ohio, Pennsylvania, Virginia 3Withholding Rules
Source: Mobile Workforce Coalition
4Employer Withholding Audits
• States are becoming increasingly aggressive in
enforcing withholding requirements – viewed as
a new revenue source.
• There are multiple difficulties associated with
withholding for a mobile workforce
• Insufficient payroll system capabilities
• Burdens placed on employees to document travel
• No uniformity across states and cities
5Employer Withholding Audits, cont.
• How do states identify potential audit candidates?
• Travel and entertainment
• Related audits
• Newspapers
• Clever use of databases
• Trigger audits of executives (even if below threshold)
6NEXUS AND TELECOMMUTING
Nexus and Telecommuting
• Telecommuting employees can create nexus for:
• Employer (withholding taxes, income and franchise taxes, as well as sales and use
taxes)
• Employee (personal income tax)
• Employee withholding
• Employee nexus
• Resident: Subject to tax on all income in resident state
• Nonresident: Taxable only on income “sourced” in state
• Employer nexus
• Statutory nexus triggered by “doing business” or “transacting business” in-
state, maintaining an office, owning or leasing property, or having employees
performing services for the employer in-state
• Telecommuting employees can create an in-state presence for employers
8Telecommuting
• New Jersey
• Telebright (N.J. Tax 2010), aff’d 2012
• The Appellate Division of the New Jersey Superior Court
held that a company was subject to corporate income tax
based on one telecommuting employee who resided in the
State.
• Ohio
• Ohio Department of Taxation website:
• “Our company has an employee that works out of their
home in Ohio. Are we required to withhold Ohio income
tax on the employee’s compensation?”
• Answer: “Yes, you must withhold Ohio income tax. Your
company is transacting business in Ohio since you have an
employee working in Ohio.”
9Telecommuting, cont.
• The following States have stated that having one to six employees
telecommuting from their home and conducting non-solicitation
activities would not establish nexus for corporate income tax
purposes:
• Indiana
• Kentucky
• Maryland
• Depends on the activities conducted in the State
• Mississippi
• Oklahoma
• Source: BNA 2018 Survey of State Tax Departments
10Telecommuting, cont.
• The following States have stated that registering for payroll purposes
with the States would establish nexus for corporate income tax
purposes:
• Kansas • Depending on circumstances
• Louisiana • California
• Maryland • Connecticut
• New Hampshire • Idaho
• Massachusetts
• New Jersey
• Pennsylvania
• Vermont
• Virginia
• Source: BNA 2018 Survey of State Tax Departments
11FRINGE BENEFITS
Fringe Benefits-Stock
• Most states follow federal rules on taxation of
stock awards
• Some exceptions:
• PA does not recognize ISOs and ESPP
• OH withholding on disqualifying dispositions
• Earned vs. recognized
• Earned over time
• Recognized at a specific point in time
• Extent of taxation and withholding is dependent
on residency status
• State tax credit may be available
13Fringe Benefits-Stock
• Inconsistency in allocation methods; e.g.
• Workdays from grant to vest
• Georgia
• New York
• Workdays from grant to exercise
• Arizona
• California
• Exceptions
• Illinois - Five-year special rule
• North Carolina - location of grant
• Ohio - Degree of appreciation method
• Most states do not have designated allocation methodology
• Default to Federal allocation rules?
14NASPP
Fringe Benefits-Stock Domestic Mobility
Survey
May 2019
15Fringe Benefits-Meals and Entertainment
• The 2017 TCJA eliminated the deduction for any expenses related to
activities generally considered entertainment, amusement or
recreation.
• Taxpayers may continue to deduct 50 percent of the cost of business
meals if the taxpayer (or an employee of the taxpayer) is present and
the food or beverages are not considered lavish or extravagant
• Food and beverages that are provided during entertainment events
will not be considered entertainment if purchased separately from
the event.
16Fringe Benefits-Meals and Entertainment
• IRS issued Notice 2018-76U, a taxpayer may still deduct 50 percent
of otherwise-deductible business meals purchased separately from
entertainment.
• In Example 1, a taxpayer purchases tickets to a baseball game and
takes a business contact. While at the game, the taxpayer purchases
hot dogs and drinks. Though the tickets to the game are
nondeductible, the hot dogs and drinks purchased at the game are 50
percent deductible because they are purchased separately from the
baseball tickets.
17Fringe Benefits-Meals and Entertainment
• However, if food and drink are included in the price of the
entertainment, the meals are not separately stated and thus may not
be deducted.
• In Example 2, a taxpayer purchases suite tickets to a basketball game
that include food and drinks, and takes a business contact. No
amount may be deducted for the food and drinks because those costs
are included with the cost of the tickets, which are a nondeductible
entertainment expense.
• Example 3 provides that had the suite tickets in Example 2 separately
stated the cost of the food and beverages, then the food and beverage
cost would have been 50 percent deductible
18Fringe Benefits-Meals and Entertainment
• IRS Technical Advice Memorandum (TAM) No. 20190301, dated
Sept. 14, 2018, was released to the public on Jan. 18, 2019.
• The IRS' position is especially significant now that, due to tax reform
changes, an employer is allowed a 50 percent deduction for meals
that qualify under IRC Section 119 through the end of year 2025,
while some other employee meals no longer are deductible at all.
19Fringe Benefits-Meals and Entertainment
• IRC Section 119 provides a limited exception for excluding from
taxable wages the value of meals that are furnished by the employer
(or on its behalf) and on the employer's business premise for the
convenience of the employer.
• Meals will be considered furnished for the convenience of the
employer if the meals are provided for a substantial
noncompensatory business reason. IRS regulations have provided
parameters of the types of situations that result in substantial
noncompensatory business reasons to meet this test, such as that the
meals are provided during the employee's normal working hours to
have the employee available for emergency calls.
20Fringe Benefits-Qualified Transportation
A ride in a commuter highway vehicle between the employee's home
and work place.
A transit pass-$270 per month
Qualified parking-$270 per month
• Qualified transportation benefits aren’t deductible. Section
13304 of P.L. 115-97 provides that no deduction is allowed for
qualified transportation benefits (whether provided directly by you,
through a bona fide reimbursement arrangement, or through a
compensation reduction agreement) incurred or paid after 2017
• While you may no longer deduct payments for qualified trans-
portation benefits, the fringe benefit exclusion rules still apply and
the payments may be excluded from your employee's wages.
21PRACTICAL CONSIDERATIONS
Obstacles
• Administrative
• Where are your workers
• HRIS/Payroll system
• Human Resources
• Multiple Forms W-2
• Contain a traveling workforce
• Tax
• Potential nexus creating activity
• Filing obligations
• Future Compliance
Morrison & Foerster LLP 23Exposure
• Quantification of the issue
• Identify traveling population
• Address any HR or strategic obstacles to compliance
• Determine withholding obligation
• Application of deminimis rules
• Ascertain level of compliance
• Potential voluntary disclosures
Morrison & Foerster LLP 24Questions
?
25Contact Us
Mindy Mayo
Ryan, LLC
408.850.4565
mindy.mayo@ryan.com
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