Mobile Workforce Bill Passes House Again, Senate Fate Uncertain

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July 7, 2017

On June 20, 2017, the House of Representatives passed legislation to simplify state income tax rules for employees who temporarily work outside their home state.  Under the Mobile Workforce State Income Tax Simplification Act of 2017 (H.R. 1393), a state generally could tax a nonresident’s wages earned in the state only if he or she is working in the state for more than 30 days during the year.  Likewise, employers would have no corresponding duty to withhold and report the tax unless the 30-workday threshold is met.  Propelled by bipartisan support, similar measures have twice passed in the House in 2012 and 2015 but failed to gain traction in the Senate.  Currently, legislation similar to the House bill is awaiting Senate consideration, and once again, faces an uphill battle amidst concerns that the bill would cause significant revenue losses to certain states—including New York—with large employment centers close to state borders.

The bill is intended to reduce confusion and compliance costs stemming from inconsistent state income tax laws on nonresident employees and their employers.  Currently, forty-three states impose personal income tax on wages, including nonresidents’ wages earned in the state.  Thus, a traveling employee working on temporary projects in multiple states may be obligated to file and pay taxes in each of those states, and the employer would have corresponding withholding and reporting obligations.  Although states have three main measures that reduce compliance costs, the measures are largely piecemeal and inconsistent.  First, states generally provide an income tax credit for income taxes paid to other states, but the credit system does not eliminate the travelling employee’s obligation to file a nonresident return and the employer’s obligation to withhold and report the tax.  Second, some states waive the income tax obligations of nonresident employees and employers based on de minimis earnings and/or time spent in the state, but the waiver thresholds vary, and not all states have them.  Third, some bordering states have entered into reciprocity agreements under which each state agrees not to tax each other’s residents’ wages (see prior coverage of NY-NJ reciprocity agreement).  But these agreements only cover one-third of the states, and are geared toward regular commuters living near state borders, rather than employees traveling to multiple states for temporary work.

The bill would impose a 30-workday threshold on state income taxation of nonresidents, but would not prevent states from adopting higher or other types of thresholds.  Reciprocity agreements of bordering states, for instance, would still be effective.  Moreover, the bill allows an employer to avoid withholding and reporting penalties if they simply rely on their employees’ annual determination of days to be spent working in the nonresident state (barring actual knowledge of fraud, collusion, or use of a daily time and attendance system).  The bill also defines what constitutes a workday to minimize double counting.  The bill would not cover the wages of professional athletes, professional entertainers, certain production employees, and prominent public figures paid on a per-event basis.  Additionally, the bill does not specifically address equity or trailing compensation and employees who work for more than one related employer.

The bill likely faces an uphill battle in the Senate because the bill would cause significant revenue losses to certain states.  Generally, states that have large employment centers close to a state border (e.g., Illinois, Massachusetts, California, and New York) would lose the most revenue, while their neighboring states (e.g., New Jersey) from which employees travel would gain revenue.  Notably, New York would likely lose between $55 million and $120 million per year—an amount greater than the estimated revenue impact on all the other states combined (a $55 million to $100 million loss).  For these reasons, three members of the House Committee on the Judiciary opposed the bill and proposed to replace the 30-workday threshold with a 14‑workday threshold.  This is, not coincidentally, the threshold New York currently has in place for employer withholding obligations (but not for employee income tax liability or employer reporting obligations).  Although rejected, the effort to reduce the threshold may ultimately reshape the bill in the Senate or signal its continued lack of action.

With the Senate preoccupied with other legislative matters such as health reform (see prior coverage of health insurance reporting under the American Health Care Act) and opposition from some powerful Senators, it is unclear whether the Senate will consider the mobile workforce bill despite bipartisan interest.  In the meantime, employers with employees temporarily working in multiple states must continue to meet their nonresident state income tax withholding and reporting obligations.  We will continue to monitor further developments on the mobile workforce bill and its impact on state income tax filing, withholding, and reporting rules.

IRS Guidance on Reporting W-2/SSN Data Breaches

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April 6, 2017

The IRS recently laid out reporting procedures for employers and payroll service providers that have fallen victim to various Form W-2 phishing scams.  In many of these scams, the perpetrator poses as an executive in the company and requests Form W-2 and Social Security Number (SSN) information from an employee in the company’s payroll or human resources departments (see prior coverage).  If successful, the perpetrator will immediately try to monetize the stolen information by filing fraudulent tax returns claiming a refund, selling the information on the black market, or using the names and SSNs to commit other crimes.  Thus, time is of the essence when responding to these data breaches.

According to the IRS’s instructions, an employer or payroll service provider that suffers a Form W-2 data loss should immediately notify the following parties:

  1. IRS. The entity should email dataloss@irs.gov, with “W2 Data Loss” in the subject line, and provide the following information: (a) business name; (b) business employer identification number (EIN) associated with the data loss; (c) contact name; (d) contact phone number; (e) summary of how the data loss occurred; and (f) volume of employees impacted.  This notification should not include any employee personally identifiable information data.  Moreover, the IRS does not initiate contact with taxpayers by email, text messages, or social media channels to request personal or financial information.  Thus, these types of requests should not be taken as IRS requests.
  2. State tax agencies. Since any data loss could affect the victim’s tax accounts with the states, the affected entity should email the Federal Tax Administrators at StateAlert@taxadmin.org for information on how to report the victim’s information to the applicable states.
  3. Other law enforcement officials. The entity should file a complaint with the FBI’s Internet Crime Complaint Center (IC3), and may be asked to file a report with their local law enforcement agency.
  4. Employees. The entity should ask its employees to review the IRS’s Taxpayer Guide to Identity Theft and IRS Publication 5027 (Identity Theft Information for Taxpayers).  The Federal Trade Commission (FTC) suggests that victims of identity theft take various immediately actions, including: (a) filing a complaint with the FTC at identitytheft.gov; (b) contacting one of the three major credit bureaus to place a “fraud alert” on the victim’s credit card records; and (c) closing any financial or credit accounts opened by identity thieves.

The IRS has also established technical reporting requirements for employers and payroll service providers that only received the phishing email without falling victim.  Tax professionals who experience a data loss also should promptly report the loss pursuant to the IRS’s procedures.

W-2 Phishing Scam Targeting More Employers, Including Chain Restaurants and Staffing Companies

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February 3, 2017

Yesterday, the IRS and state tax agencies issued a joint warning to employers that the Form W-2 phishing scam that first affected large businesses last year has now expanded to other organizations, including chain restaurants, staffing companies, schools, tribal organizations, and nonprofits.  The scam involves emails sent to payroll or human resources employees that appear to be from organization executives and request a list of all employees and their Forms W-2.  Once the scammer receives the information, it can be used to file false tax returns and claim employee refunds.

According to IRS Commissioner John Koskinen, this is one of the most dangerous phishing scams the tax world has faced in a long time.  The IRS and its state and industry partners, known as the “Security Summit,” have enacted safeguards in 2016 and 2017 to identify and halt scams such as this, but cybercriminals simply evolve their methods to avoid those safeguards.  A 2016 Government Accountability Office report found that in 2014, the IRS paid an estimated $3.1 billion in fraudulent identify theft refunds.  The report also found that the IRS prevented the payment of or recovered another $22.5 billion in identify theft refunds in the same year.  Both numbers were down from the prior year, but it is somewhat unclear whether that is a result of a change in the methodology used to calculate the estimates.

To add insult to injury, some scammers are going back to the well, by following-up on the Form W-2 request with an email requesting a wire transfer.  As a result, some entities have not only exposed their employees’ personal information and made them vulnerable to potential identify theft but also lost thousands of dollars.  Employers should ensure that payroll, treasury, and accounts payable processes and procedures are in place to prevent the unauthorized sharing of Form W-2 information and unauthorized wire transfers.

Organizations that receive a scam email should forward the email to phishing@irs.gov, placing “W2 Scam” in the subject line.  In addition, organizations should file a complaint with the Internet Crime Complaint Center (IC3), which is operated by the FBI.  If an organization has already had Forms W-2 stolen, it should review the Federal Trade Commission and IRS’s recommended actions, available at www.identitytheft.gov and www.irs.gov/identitytheft, respectively.  Employees concerned about identity theft can consult Publication 4524 and Publication 5027 for information.  If an employee’s tax return gets rejected because of a duplicate social security number, he or she should file Form 14039, “Identity Theft Affidavit.”

D.C. Council Passes Mandatory Paid Leave Bill

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December 22, 2016

The District of Columbia Council passed a generous paid family leave bill on Tuesday by a 9-4 margin.  The bill will provide eight weeks of paid leave to new mothers and fathers, six weeks for employees caring for sick family members, and two weeks for personal sick leave.  As we explained in a prior post, the District will fund the new benefit with a new 0.62 percent payroll tax on employers.  Large employers, some of whom already provide similar benefits to employees, have been increasingly outspoken against the bill, taking issue with what it views as a bill requiring them to fund paid leave for small employers who do not currently offer such benefits.  Despite large employers’ strong lobbying effort, which were joined by Mayor Muriel Bowser, the bill still passed by a comfortable margin.  Mayor Bowser has not indicated whether she will sign the bill, but the 9-4 vote is sufficient to override a veto.  Regardless of Mayor Bowser’s decision, the program will likely not get off the ground until 2019 due to the administrative hurdles required to implement the new system.

D.C. Council Moves Closer to Enacting Employer Payroll Tax to Create Nation’s Most Generous Family Leave Law

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December 7, 2016

On December 6, the District of Columbia Council advanced a bill known as the Universal Paid Leave Act of 2016.  The bill would impose an estimated $250 million in employer payroll taxes on local businesses to fund a paid leave benefit created by the bill.  The bill would raise the funds by creating a new employer payroll tax of 0.62%.  Self-employed individuals may also opt-in to the program by paying the tax.  Federal government employees and District residents who work outside of the District would not be covered by the bill.  However, Maryland and Virginia residents who work within the district would be covered and entitled to benefits from the government fund created by the bill.

If ultimately passed, the bill would require businesses to provide eight weeks of paid time-off for both full and part-time workers to care for newborn or adopted children.  The bill, which advanced on an 11-2 vote, will also guarantee six weeks of paid leave for workers to care for sick relatives, as well as two weeks of annual personal sick leave.  (Many employees would already qualify for unpaid leave under the Federal and District family and medical leave laws.)

A government insurance fund funded with the new employer payroll taxes would pay workers during their leaves. The bill provides for progressive payment rates, such that lower-income individuals receive a greater percentage of their normal salary during periods of time off covered by the program.  The fund created with the tax revenue would pay a base amount equal to 90% of a worker’s average weekly wage up to 150% of the District’s minimum wage.  (Based on the District’s current minimum wage laws, the base amount is expected to be calculated on up to $900 in weekly salary by the time the program would take effect based on a $15 per hour minimum wage rate that is currently being phased in.)  An employee whose average weekly wage exceeds 150% of the District’s minimum wage would receive the base amount plus 50% of the worker’s weekly wage above the District’s minimum wage.  Payments would be capped at $1,000 a week, with the cap being subject to increases for inflation beginning in 2021.

The bill must pass a final D.C. Council vote on December 20 and approval by District Mayor Muriel E. Bowser. A Bowser spokesman reported that the mayor was still undecided on the bill.  If the bill ultimately passes, benefits would likely not be available before 2019, as the District would need time to prepare and fund the program.

New Jersey and Pennsylvania Will Maintain Tax Reciprocal Agreement

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November 23, 2016

New Jersey Governor Chris Christie, who promised in September to revoke New Jersey’s 40-year-old tax reciprocal agreement with Pennsylvania, announced through a November 22 statement that he would continue the agreement.  Governor Christie had said he would eliminate the State of New Jersey and the Commonwealth of Pennsylvania Reciprocal Personal Income Tax Agreement unless the New Jersey legislature took steps to reduce public employee health insurance costs.

The stated impetus for scrapping the agreement was to make up for a budget deficit: cancelling the agreement was estimated to produce $180 million in revenue for New Jersey. Under the agreement, New Jersey and Pennsylvania residents who work in the other state are only required to file a tax return in their state of residence.  Pennsylvania residents working in New Jersey must file Form NJ-165, Employee’s Certificate of Nonresidence in New Jersey, and New Jersey residents working in Pennsylvania must file Form REV-419EX, Employee’s Nonwithholding Application Certificate, with their employers to avoid having New Jersey taxes withheld from compensation.

Without the agreement, residents of Pennsylvania and New Jersey who work in the other state would need to file two tax returns and claim a credit against taxes owed in their state of residence for taxes paid in their state of employment. Because Pennsylvania imposes a 3.07% flat tax and New Jersey imposes a graduated tax that is capped at 8.97%, New Jersey would greatly benefit from taxing the income of Pennsylvania residents working in New Jersey.  However, cancelling the agreement would have hurt many lower-income New Jersey residents who work in Pennsylvania (Philadelphia, in particular), as they would be forced to pay Pennsylvania’s 3.07% flat tax, instead of the lower New Jersey graduated rate.

However, Governor Christie stated that the agreement could continue due to the $200 million in savings caused by a public worker union-backed health care bill that was signed into law on November 21 (S2749).  The new legislation saves money by adjusting the process through which public workers receive their prescriptions.  Several major corporations that operate in New Jersey, including Subaru of America and Campbell Soup Co., have already praised the decision to maintain the agreement.

Philadelphia Updates Wage Tax Return to Enable Reporting of Tip Income and Prevent Overassessment of Wage Tax Against Restaurant Employers

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June 17, 2016

A recent change to the Philadelphia Wage Tax Return addresses an issue that has plagued restaurants with tipped workers subject to the Philadelphia wage tax, yet the change to correct this issue has gone largely unnoticed by some restaurants.  Restaurants that operate within Pennsylvania and employ Philadelphia residents have historically been assessed for wage taxes they could not withhold and subjected to penalties and interest imposed by the City of Philadelphia for failing to withhold the Philadelphia wage tax on tip income earned by tipped workers.  These penalties were not only surprising, but also unjustified in many cases, given that restaurants often cannot withhold the full amount of the wage tax required by Philadelphia law.  Under the stacking rules that apply to wage withholding, employers must withhold taxes in a predetermined order prescribed by law, beginning with FICA taxes, then Federal income taxes, then state taxes, and lastly, local taxes.  Local taxes, such as the Philadelphia wage tax, often cannot be withheld because there is simply no money left after Federal and state taxes are taken out.  However, employers have been repeatedly punished with underpayment penalties imposed by the Philadelphia Department of Revenue with respect to the Philadelphia wage tax.

To rectify this situation, the City of Philadelphia has updated its Wage Tax Return, such that the 2015 version now provides on Line 3 an opportunity for employers to report the tip wages earned by employees on which the Philadelphia wage tax could not be withheld. The instructions to the 2015 Wage Tax Return explain that the employer should report the amount of tip income reported to the employer by the employee and any other tips allocated to the employee by the employer—the withholding liability is based only on wages under the employer’s control (other than tips) and amounts turned over voluntarily by the employee to the employer.  This is a welcome change by the Philadelphia Department of Revenue that addresses an issue that has caused significant headaches for many restaurants.