Transitioning from a business which operates in a single state to one that operates in multiple states is an important step towards becoming a large business, one of which business owners should be proud. However, while it presents many opportunities, there are also challenges, one of the most poignant of which is multiple state taxation. Below are some ways in which employers can deal with this situation.
What Makes Multi-State Taxation So Challenging?
One challenging aspect of multi-state taxation is figuring out how to track workers over state lines. Another is keeping abreast of the taxation requirements of different states, which is subject to change at any time. Dealing with these two challenges can quickly strain small and even some medium sized businesses.
Businesses that operate in more than one state could find themselves liable for both withholding and taxes if their employees are traveling and working in different jurisdictions. The withholding and tax thresholds will also differ between the states, which makes compliance even harder. Compliance ultimately requires resources and time that employers may not constantly have, so it isn’t uncommon for companies to find themselves in a conundrum.
Federal Or State?
Another thing which makes multi-state taxation compliance difficult is that the line between state rules and federal rules has become blurred in recent years. Federal taxes are those which apply to every American citizen, which were enacted by legislators and are enforced through the Internal Revenue Service. Citizens are also subject to state taxes which depend on the state in which they live. Every state will have its own distinct rules for taxes, so there is no uniform guideline which connects them all.
Additionally, the U.S. economy has changed substantially over the last few decades, transforming from one which is product based to one which is service based. As a consequence, technology is changing so rapidly that it is becoming hard for state laws to keep up. New services are being introduced at a rate where keeping track of them has become very complex.
Possible Solutions For Employers
The majority of businesses are in the middle of the spectrum, which means that they choose a compliance level which is in alignment with their particular industry landscape, risk aversion and available resources. Companies will first need to determine the risk level they’re subject to so that they can determine if they’re comfortable with it. Some of the factors which should be considered are how to make payments, monitor employee travel and other adjustments.
Monitoring employee travel is one of the toughest, since most employers don’t have a precise way of doing it. Plus, many businesses also depend on expense reimbursements and travel suppliers. Figuring out what state requirements are applicable to employees that work and travel in different areas is very challenging, largely because tracking and assessing changes between jurisdictions requires considerable resources, which are beyond the means of most small and medium sized businesses.