Tax question: Nexus for company but for employees too?

Posted by daysdreaming on April 21, 2009, 4:49 pm

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Hi! We are a small commercial diving company based in
Indiana. We send a team of 5 divers (employees, not
independent contractors) to various states for short periods
of time to perform services. The company for whom the work
was performed pays us the total invoice for labor and
materials, and then we pay our employees from our business
payroll account. Our business pays taxes to that state in
which the work was performed at the end of the year. Are we
legally required to withhold taxes from each employee for that
state in addition to the employee's state of residence (or
Indiana, where they work), or are we covered as long as the
company is paying the state taxes?

Thank you so much for any help you can offer. This is a hotly
contested topic right now in our business, and as the new
payroll manager, I'm not sure where to turn.

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Posted by Paul Thomas, CPA on April 21, 2009, 6:43 pm

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> Hi! We are a small commercial diving company based in

> Indiana. We send a team of 5 divers (employees, not

> independent contractors) to various states for short periods

> of time to perform services. The company for whom the work

> was performed pays us the total invoice for labor and

> materials, and then we pay our employees from our business

> payroll account. Our business pays taxes to that state in

> which the work was performed at the end of the year.

> Are we legally required to withhold taxes from each employee

> for that state in addition to the employee's state of residence

> (or Indiana, where they work), or are we covered as long as the

> company is paying the state taxes?

More than likely you will find that withholding must be done in each state
on the wages your employees earn in each state.

Start by contacting each state's tax withholding department to find out for
sure.

My best guess is that you would only be dealing with the withholding tax
issues, as your state of Indiana would handle any DOL claims for
unelmployment, workers comp, etc - but check on that as well while you have
them on the phone.

> Thank you so much for any help you can offer. This is a hotly

> contested topic right now in our business, and as the new

> payroll manager, I'm not sure where to turn.

Well, states and localities are beefing up their enforcement of this type of
thing (payroll tax, sales tax, business licenses, etc) as they seek out more
funds to put in the tax coffers. Contractors are prime targets, as well as
service providers. It's an easy thing to check also, cross reference your
corporate return with the withholding reports, etc. If there are some, stop
looking. If there aren't any, then send out a notice.

--
Paul Thomas, CPA
Watkinsville, Georgia

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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Posted by Katie on April 23, 2009, 2:19 pm

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On Apr 21, 1:49 pm, daysdream...@gmail.com wrote:

> Hi! We are a small commercial diving company based in

> Indiana. We send a team of 5 divers (employees, not

> independent contractors) to various states for short periods

> of time to perform services. The company for whom the work

> was performed pays us the total invoice for labor and

> materials, and then we pay our employees from our business

> payroll account. Our business pays taxes to that state in

> which the work was performed at the end of the year. Are we

> legally required to withhold taxes from each employee for that

> state in addition to the employee's state of residence (or

> Indiana, where they work), or are we covered as long as the

> company is paying the state taxes?

> Thank you so much for any help you can offer. This is a hotly

> contested topic right now in our business, and as the new

> payroll manager, I'm not sure where to turn.

--
<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
<< ------------------------------------------------------- >>

Posted by Katie on April 23, 2009, 2:40 pm

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On Apr 21, 1:49 pm, daysdream...@gmail.com wrote:

> Hi! We are a small commercial diving company based in

> Indiana. We send a team of 5 divers (employees, not

> independent contractors) to various states for short periods

> of time to perform services. The company for whom the work

> was performed pays us the total invoice for labor and

> materials, and then we pay our employees from our business

> payroll account. Our business pays taxes to that state in

> which the work was performed at the end of the year. Are we

> legally required to withhold taxes from each employee for that

> state in addition to the employee's state of residence (or

> Indiana, where they work), or are we covered as long as the

> company is paying the state taxes?

> Thank you so much for any help you can offer. This is a hotly

> contested topic right now in our business, and as the new

> payroll manager, I'm not sure where to turn.

Echoing Paul: Your employees are individual income taxpayers in every
state where they perform services on your behalf. In general, you
must register as an employer with each of those states and withhold
state income tax from your employees' wages and remit the tax to the
state where the employee worked. Whether or not your company
withholds or reports to the nonresident states, the employee remains
liable for the state's tax unless his or her services there are below
a statutory or administrative threshold, which is usually expressed in
terms of either days worked or dollars earned in the state. Many
states have no such "de minimis" rules, but at least theoretically
tax, and require withholding from, the first dollar earned by the
employee in the state. Also, frequently the de minimis threshold
applies to the employer's requirement to withhold but not necessarily
to the employee's responsibility to file and pay the tax.

I have told this story many times in this forum and elsewhere, but
once again: In the late 1980s I worked for one of the major
multinational accounting and consulting firms. The firm's consulting
arm had a large contract (an ERP installation, IIRC) with a client
headquartered in Denver. The firm had a number of fairly highly
compensated individuals, nonresidents of Colorado, working on this
contract for months at a stretch, and did not withhold Colorado state
or Denver local income tax from the nonresident employees' wages.
Somehow, perhaps through an audit of the client company, the Colorado
DOR became aware of this. There was talk of criminal prosecution of
the firm for failure to withhold. As you might imagine, the firm very
quickly got into compliance, and for the past 20 years I would venture
to guess that all of the larger multistate accounting, consulting, and
law firms have required their employees to report on their time sheets
not only the client for whom their services were performed, but also
WHERE the work was done. Many smaller firms, however, remain unaware
of their obligations.

There are exceptions, of course. Some pairs of states have reciprocal
agreements under which a resident of one state working in the other
owes tax only to the state of residence. An employee who is a
resident of one such state and works in another would not be subject
to tax in the state where the services were performed, and no
withholding would be required. Where there is no such reciprocal
agreement between the residence state and the source state, the
general rule is that the residence state allows the individual
taxpayer credit for the tax paid to the source state (the state where
the services were performed), so in general, the employer should
withhold for the source state and correspondingly reduce withholding
for the residence state. However, there are a few pairs of states
that stand in a reverse credit relationship whereby the source state
allows credit for the tax paid to the residence state; in that
situation, the employer should withhold for the source state only to
the extent that its withholding requirement is greater than the
resident state's for the same income and W-4 characteristics.

And of course there are a few states that do not impose individual
income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas,
Washington, and Wyoming. New Hampshire and Tennessee tax only
interest and dividend income of residents; they do not tax wages of
residents or nonresidents.

I know this is complicated, but it is important for both the company
and its employees to be in compliance. Paul's advice to contact each
of the states involved is excellent; that's a quick way to determine
whether the company needs to withhold and the employee needs to file
in each of the states.

Katie in San Diego

.

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
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Posted by Steve Pope on April 23, 2009, 3:16 pm

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>Echoing Paul: Your employees are individual income taxpayers in every

>state where they perform services on your behalf. In general, you

>must register as an employer with each of those states and withhold

>state income tax from your employees' wages and remit the tax to the

>state where the employee worked.

There must be some threshold criteria here, because employers
do not pay out-of-state taxes every time they send an employee
on an interstate business trip.

I suppose in the case of the diving service example, an
entire contract is fulfilled by workers working out-of-state,
and so the remote state wants tax on it, just as if it
had been performed by an in-state contractor. I also
know professional athletes pay tax in each state worked.

Is there a formula by which one figures whether it's
an issue?

Steve

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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2007) - All rights reserved. >>
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