The start of a new year always brings with it thoughts about the upcoming tax season. For businesses, tax season can be especially complicated for many reasons; particularly if you have employees that travel out-of-state to fulfill a temporary labor gap or work at a different office location.
Tax guidelines are different from state-to-state, and requirements vary based on your length of stay. Penalties for non-compliance can significantly impact your bottom line. Here’s an overview on how travel tax works.
What is travel tax?
In general, employers are expected to pay or reimburse their employees for any business travel expenses they incur. Covered expenses include airfare, lodging, car rental, and any reasonable incidental expenses incurred while traveling. Your company travel policy outlines the specifics, which may include meals, laundry, and Wi-Fi.
Whatever your company provides you as reimbursement such as lodging, airfare, or any other travel related expenses are considered personal commuting expenses and must be considered taxable compensation.
Personal travel expenses are not reimbursable
Expenses incurred between an employee’s home and their regular workplace location are not reimbursable and are considered personal expenses to the employee (gasoline, toll roads, etc). The personal travel expenses rule also applies to living in one state with your regular workplace location in another state.
Temporary work locations and commuting expenses
If an employee travels between two or more work locations, the commuting expenses between the locations are deductible. This is also true for someone employed by two different employers. In the event that the commuter does not go directly from one location to the other, only the amount of the commuting expense is deductible.
Temporary workplaces
Temporary workplaces can cause further confusion regarding taxes. The first area of focus should be on the length of time spent at the temporary workplace.
One year or less
If the job is forecast to last for one year or less, the tax home does not move, and taxes should be paid to the state of the employee’s residence. Any travel related taxes between the employee’s home and the temporary workplace would be considered as tax-free to the employee, and designated as business travel.
If a temporary assignment is estimated to be under a year, but extends past the year period, the tax home will move to the new location at the time of extension. Any business or commuting expenses are considered tax-free before the extension. Anything after the time of extension then becomes taxable compensation.
One year or more
If the assignment extends over one year, the tax home for the employee will move to the temporary workplace, and taxes should be paid to the state of the new work site. Additionally, any travel between the employee’s home and the new workplace is now considered taxable compensation to the employee, as they are deemed personal commuting expenses.
9 States that do not impose income tax
Did you know that there are nine states that do not impose income tax? If you live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, your states do not have income tax. If you live in New Hampshire or Tennessee, your states do not tax earned income, but they do tax income from investments and dividends.
If you are unsure of what the requirements are in your state, it’s best to visit your state government website to understand the tax implications where you work. Familiarize yourself with city taxes as well. For example, in the state of Michigan there are currently 24 cities that impose income tax for residents and non-residents (non-residents would be those who work in that city, but do not live there).
How do taxes work when you live in one state and work in another?
Most of the United States have either a requirement to pay taxes upon the first day of work in that state or after meeting a specific state threshold (i.e., after 45 days of work). Some states might even offer a reciprocity agreement, which means you can work in a state, but only pay taxes in your home state. It is a near guarantee that if you are working in a state not listed above, income taxes will be a required withholding in that state.
For employers, there are many different tax requirements to be kept apprised of, depending on where you are sending your employees to work. Non-compliance can result in fines.
Employer-provided housing – Is it a fringe benefit or not?
The IRS defines fringe benefits as a “form of pay in addition to stated pay for the performance of services.” Compensation packages typically include a company car, retirement benefits, health insurance, and workers’ compensation. Most employer-provided housing counts as a fringe benefit, which is taxable income and will show up as a line item on your W2 statement (typically boxes 1,3 and 5). Employers have the option of denoting as paid in a pay period, or on a quarterly, semiannual or annual basis, but must be done on a yearly basis.
One important exception to this rule: If the recipient is not your direct employee, such as an independent contractor or partner, then the benefit is not subject to employment taxes. Here are more circumstances where exclusions can occur for employer-provided housing:
- Convenience for the employer
- Temporary work locations
- Lodging furnished by education institutions
As with every aspect of a new hire, all employee-provided housing benefits must be provided in writing. In your written agreement, you’ll want to cover any housing rules (i.e., no smoking and who is allowed to live in the home, including pets). You will also need to determine if the arrangement is a license or tenancy.
- License: Requires the tenant to move out immediately once they are no longer employed by the contracted employer.
- Tenancy: Rent is paid by the employee to the employer. If the employee quits or is fired, they cannot be asked to immediately vacate.
As an employer, it is crucial that you understand all the tax laws and implications before you begin to do business in other states. For a comprehensive tax guide to fringe benefits, visit IRS.gov.
To make sure you and your employees are fully compliant with federal, state, and city-specific tax requirements, consider implementing an integrated solution that makes these tax determinations automatic.
Join CLC Lodging now and let our experienced team help you manage all of your travel, budget, reporting, and billing needs in one easy system.
