May 18th, 2012 by Angela Offerman
The House of Representative passed legislation this week to streamline tax withholding compliance requirements for employers and for their employees who work in more than one state. H.R. 1864, the Mobile Workforce State Income Tax Simplification Act of 2011, passed by voice vote after a year of strong support from many groups, including the National Taxpayers Union, the National Association of Manufacturers and the American Institute of CPAs. The bill establishes a single national standard for the withholding of state income taxes for nonresidential employees with a 30-day threshold for tax liability and employer withholding.
As sovereign governments, states are free to set their own income tax policy as long as it does not place a significant burden on interstate commerce. However, with 41 states currently imposing their own state policies, the country has widely varying and inconsistent standards regarding both the requirements for employees to file personal income tax returns when temporarily traveling to a nonresident state and for employers to withhold income tax on employees who travel outside of their state. Congressmen Howard Coble, R-N.C. voiced his concern about the harmful effects on small businesses and economic growth stemming from the diversity of state laws. “For example, some states require a nonresident to pay income tax if he or she works in that state for just one day. Other states do not collect taxes until the nonresident works for a certain numbers of days in the jurisdiction. Small businesses must expend considerable resources just to figure out how much they must withhold for their traveling employees in 41 different jurisdictions. Employees are also confused about when their tax liability is triggered and in which states they must file a tax return,” he stated.
Under the legislation, states are still free to set any income tax rate they choose, but by eliminating the disparity in state income tax withholding laws and de minimis exemption periods, tax simplification will be provided on both the federal and state level. States and local jurisdictions will be ensured to receive the taxes they are owed, and the extensive amount of resources previously allocated to compliance efforts can be put towards creating meaningful jobs and growing the economy.
While there is no accompanying piece of legislation in the Senate yet, AICPA president and CEO Berry Melancon, applauded the bill’s passage as a “crucial step toward balancing and streamlining onerous recordkeeping and reporting requirements for workers who are required to file nonresident personal income tax returns because they work temporarily outside their home state.”
For a copy of the bill and notes on the original hearing before the House click here.
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