Workshop JJ Challenging Employment Taxes Payroll, Fringe Benefits - - PDF document

• 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.

MINDY MAYO

Principal mindy.mayo@ryan.com 408.850.4565 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. Previous

• Director, Human Capital Tax, Ryan, San Jose office
• Director, Employment Tax Practice, national accounting firm
• 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)

Mindy Mayo, Ryan LLC Human Capital Tax

January 2020

CHALLENGING EMPLOYMENT TAXES -

PAYROLL, FRINGE BENEFITS AND YOUR NIGHTMARE… TRAVELERS AND TELECOMMUTERS

• Withholding and Payroll Tax Issues
• Nexus and Telecommuting
• Fringe Benefits
• Stock Options
• Meals and Entertainment
• Transportation

Agenda

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WITHHOLDING AND PAYROLL TAX ISSUES

• 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

Employer Withholding

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Withholding Rules

Source: Mobile Workforce Coalition

• 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

Employer Withholding Audits

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• 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)

Employer Withholding Audits, cont.

NEXUS AND TELECOMMUTING

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• 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

Nexus and Telecommuting

• 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.”

Telecommuting

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• 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

Telecommuting, cont.

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• The following States have stated that registering for payroll purposes

with the States would establish nexus for corporate income tax purposes:

• Kansas
• Louisiana
• Maryland
• New Hampshire
• New Jersey
• Pennsylvania
• Vermont
• Virginia
• Source: BNA 2018 Survey of State Tax Departments

Telecommuting, cont.

• Depending on circumstances
• California
• Connecticut
• Idaho
• Massachusetts

FRINGE BENEFITS

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• 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
• n residency status
• State tax credit may be available

Fringe Benefits-Stock

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• 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?

Fringe Benefits-Stock

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Fringe Benefits-Stock

NASPP Domestic Mobility Survey May 2019

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• 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.

Fringe Benefits-Meals and Entertainment

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• IRS issued Notice 2018-76U, a taxpayer may still deduct 50 percent
• f 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.

Fringe Benefits-Meals and Entertainment

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• 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

Fringe Benefits-Meals and Entertainment

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• 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.

Fringe Benefits-Meals and Entertainment

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• 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.

Fringe Benefits-Meals and Entertainment

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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.

Fringe Benefits-Qualified Transportation

PRACTICAL CONSIDERATIONS

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• 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

Obstacles

Morrison & Foerster LLP

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• 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

Exposure

Morrison & Foerster LLP

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Questions

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Mindy Mayo

Ryan, LLC 408.850.4565 mindy.mayo@ryan.com

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