Multistate Tax Compliance Tops List of Critical Payroll Issues

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By Michael Trimarchi

Compliance with multistate tax policies is among the top issues facing payroll professionals, members of Bloomberg BNA's Payroll Library Advisory Board said Aug. 6.

The board members, who held their annual meeting at Bloomberg BNA headquarters in Arlington, Va., also discussed other critical issues for payroll departments, including international payroll, local minimum wage and hour requirements and the Affordable Care Act.

A Variety of Rules

Multistate sourcing, especially when related to deferred compensation, is a big issue for audit purposes, said Patrick McKenna, CPA, tax director for Prudential Financial Inc. Payroll departments need to know the years to which the services relate, along with salary and other compensation, he said.

The overall allocation is important, especially for employees who travel, said Fred A. Basehore Jr., CPP, senior manager for KPMG's international executive services and employment tax practice.

If employees spend too much time in one place, their tax home shifts, Basehore said.

When it comes to taxation, Basehore said: “A lot of states have de minimis rules. Some states have no de minimis rules—it's just instant.”

Multistate taxation generally should be looked at every pay period, with an eye on the trailing period, said Charlotte Hodges, CPP, payroll manager for Towers Watson & Co.

“Sourcing of the trailing equity is a big question,” Hodges said. In some cases, employees who travel to a high-taxation state might wonder if another state with lower tax rates would be more appropriate. The real issue is that a tax obligation might exist no matter where the employee travels, she said.

“You have to look to the state to see what the rules are,” Hodges said.

Merging Payrolls

Most employers do not have to deal with mergers and acquisitions, but those cases raise the question of overlapping workweeks, said Martin Armstrong, CPP, vice president of payroll shared services for Time Warner Cable Inc.

Having a successful transition to a new workweek requires using the correct dates, Armstrong said.

Understanding tax rules   and keeping compliant are   ongoing challenges for most payroll departments.

“It's a one-time event, and you can’t believe how many people can’t get that right,” Armstrong said.

At the international level, knowing what is taxable from one country to the next can be complicated, said Barbara Youngman, CPP, president of the American Payroll Association and a consultant on payroll issues.

“Go into a country, you have to know what’s taxable,” she said. “If you bring in lunch, it’s taxable to those employees. So try to understand what those fringe benefits are: What is taxable in those countries?”

Overseas employers often think U.S. taxable fringe-benefit laws are strict, Basehore said, but the same could be said of foreign tax rules.

“There are some countries where even a 39-cent pen, if that’s given as a gift, that’s taxable,” Basehore said. “And it's no questions asked. You’ve got to do it.”

Compliance Conundrum

The Affordable Care Act, with key provisions for employers taking effect in 2015, is a major focus for payroll departments, said Lois Fried, CPP, a senior learning specialist for Automatic Data Processing LLC.

The law has a number of requirements that affect payroll processing, including employer shared responsibility provisions and information reporting requirements. Many employers are to confront a 40 percent excise tax on high-cost health plans, which is to take effect in 2018.

For employers, information on ACA tax policies is critical for payroll processing, Fried said.

Compliance is a critical aspect of the payroll process, with questions centering on what is correct or incorrect, Hodges said. “Metrics and analytics help us stay in compliance,” especially in a rapidly changing policy environment, she said.

Although changes to federal and state payroll requirements generally occur on a predictable schedule, such as annually, local jurisdictions often make changes with little warning, Hodges said, adding that payroll departments do not want to miss important policy changes.

States and localities also have been changing their minimum wages and requiring leave and other benefits with greater frequency, said Brent R. Gow, CPP, director of global payroll consulting and compliance for Starbucks Coffee Co. Some of those changes can have a big effect on garnishments, he said. Large organizations with operations in these localities are struggling to keep up with these changes and stay compliant.

Fried agreed that compliance was a key element of payroll.

“That’s one thing about payroll professionals and practitioners, and human resource and benefits—everybody looks at ways to be in compliance,” Fried said. “We want to do things right.”

The deadline for Bloomberg BNA's and Ernst and Young LLP's multistate income tax survey was extended to Aug. 21. Participants are to receive a complimentary copy of the results.

To contact the reporter on this story: Michael Trimarchi in Washington at