What to Know About Taxes When Sending Workers Out of State
Businesses often find themselves in a position in which it makes sense to send employees out of state — perhaps to temporarily fulfill a labor gap or a skill shortage in a particular area.
But what impact will this have when tax season rolls around?
Sending workers out of state can cause some complications, but we’ll break it down for you as painlessly as possible. Read on for everything you should know about taxation when sending employees out of state.
Taxation in Multiple States
Each state has different tax requirements. Withholding requirements challenge the employers of mobile workforces or those who conduct business operations in other states.
If an employer sends employees to work in more than one state, in most cases, state income taxes will need to be withheld within those states. However, there are exceptions.
One exception is states that don’t have an income tax.
States that don’t tax income are:
- New Hampshire
- South Dakota
In some states, income taxes only start to accrue after the employee has earned a certain amount.
Other states have established reciprocal agreements. In these cases, residents of one state can work in a state under the agreement, but will only need to pay income taxes in their home state.
It’s important to do your due diligence because even a single day’s work is subject to income taxes in some states.
Due to the nuance, make sure you understand the ins and outs of the particular state (or states) where your employees will be traveling for work.
Start with some research on irs.gov, then check on the details with your CPA or a tax lawyer.
What Are Fringe Benefits?
Income isn’t the only thing to consider when it comes to the tax implications of sending workers out of state. There are also expenses like housing.
Most employer-provided housing counts as a fringe benefit, which the IRS defines as a “form of pay for the performance of services.”
A company car is another example of something that falls under the fringe benefit category. Retirement benefits, health insurance and workers’ compensation are also fringe benefits.
Fringe benefits are taxable and thus must be included in the beneficiaries’ pay.
When is Employer-Provided Housing Taxable to the Employee?
Housing — or housing allowances — provided as a fringe benefit is taxable and subject to withholding, just like regular income tax.
This amount will need to be added to the employee’s W-2 form in box 1. Any additional fringe benefits can be added there as well.
When Is Employer-Provided Housing Not a Fringe Benefit?
Employer-provided housing is usually considered a fringe benefit, but again, there are exceptions.
The value of employee-provided housing can be excluded if it meets these three conditions, as defined by the IRS:
1. Convenience of the Employer
To qualify for this exclusion, the employee housing must meet the following three criteria:
- It’s provided on your business premises
- It’s furnished for your convenience
- The employee must accept it as a condition of employment
Let’s break down what each of these criteria entails.
On Business Premises
To meet the first criterion, the employee’s place of work is also where they live.
A live-in nanny, full-time caregiver or another type of household employee are some examples of those that qualify. Building superintendents and maintenance professionals who live on-site to attend to potential issues around the clock also fall under this exception.
Furnished for Your Convenience
Lodging for convenience must have a substantial business reason other than just providing the employee with more pay.
A written statement stating that the lodging is furnished to your employee for your convenience isn’t sufficient. Accommodation for your convenience depends on more substantial facts and circumstances.
There is proof of the substantial facts and circumstances when both the condition of employment, and the business premises conditions are met. For example, the duties performed by oilfield crews in a remote area require a close proximity to the job site in order for the job duties to be properly executed.
Condition of Employment
This means that your employee has to accept the lodging as a condition of their employment because they need to live on the premises to perform their job duties.
Examples would be if a worker needs to be on-call at all times, or if the location is remote, making a daily commute impractical.
Example of Qualifying Lodging Criteria
What types of industries can provide employee housing without it being taxed?
One example is construction. If a site is located in a remote area, on-site lodging may be provided, which could be eligible for this exclusion.
Under the same circumstances, if you also provide meals on-site, you can exclude those as well.
However — It won’t count as an exclusion if you give your employee the option of receiving additional pay instead of lodging. Even if they choose the housing, if the option is there, it won’t qualify for the exclusion.
The exclusion also doesn’t apply if you offer cash allowances for housing.
2. Temporary Work Locations
In order to get the exemption granted for temporary work locations, you must meet two conditions:
- Your employees’ duties require them to be away from their tax home (not their home, but the regular place of business) considerably longer than a single day’s work.
- The assignment is temporary — meaning under a year. Anything a year or over is considered indefinite.
If an employee works for eight months out of state and chooses to keep their tax home where it is, the lodging may be considered a tax-free reimbursement under the organization’s accountable plan.
3. Lodging Furnished by Educational Institutions
Some educational institutions offer faculty housing programs — either free or at a reduced rate — as campus lodging.
The tax code allows exemptions for the value of amounts in excess of whichever amount is less:
- If qualified, 5% of the appraised value of the housing, or
- The average of the rental unit amount paid by individuals, excluding students and/or employees, during the calendar year for comparable lodging. Essentially, the fair market value of the space.
Educational institutions are not defined strictly as colleges or universities. Academic health centers also fall under this category.
At this time, California is the only state in which employer-provided lodging is subject to taxation. Although state income tax does not apply, lodging is subject to other taxes: State Unemployment Insurance, Employee Training Tax and State Disability Insurance.
Do You Know: What Is M&IE in Per Diem?
Put the Employee Housing Terms in Writing
If you decide to provide an employee with housing, you must draft a written agreement stipulating the rental terms.
It should include house rules (e.g., no smoking, pet policy and if anyone outside of the immediate family is also allowed to live there).
As an employer, there are two approaches to offering employee housing:
A license grants the individual permission to use the property, and that use can tie to the employment contract as a condition of employment.
Under this term, employees will have to move out of the home immediately once they are no longer employed.
In this type of arrangement, the employee pays the employer rent. In some cases, you may deduct the amount from the employee’s wages.
A downside is if the employee quits or gets fired, the employer cannot ask that they immediately vacate the premises. Instead, they must take the eviction route set forth by that state which can be a lengthy and time-consuming process.
As with any landlord-tenant relationship, don’t overlook getting a written statement signed by you and the renter(s). It should specify the occupancy terms of the employer-provided housing.
When drafting such a document, it’s a good idea to be proactive. Consider different scenarios, and do your best to protect yourself. In some cases, it’s wise to seek counsel from a professional and be aware of local landlord-tenant laws.
What to Do if Your Employer-Provided Housing Doesn’t Qualify for a Tax Exemption
If you don’t meet the requirements set forth by the Internal Revenue Service, you will need to tax your employees’ housing as a fringe benefit.
Fringe benefits are subject to both federal income tax and social security tax.
Report the fair market value on the employee’s W-2 form on boxes 1, 3, and 5 of the Wage and Tax Statement. If the employee contributes any portion toward housing, deduct that amount from the total.
Property Options and Tax Implications
If you send employees to a specific location for months on end, buying property or housing units may be worth it to offer as employee lodging.
Property Owned by the Business
If you buy property to offer as employee lodging, you will have to pay property taxes, which are calculated based on the home’s assessed value. The assessed value is not the same as the fair market value and is only obtained by having an assessor come out to the property.
Per the IRS, you can deduct property taxes; however, there are restrictions to what portion you can deduct as a business expense.
Property taxes vary from state to state. In order to determine the state law, type “property taxes in (specific state)” into a search engine or check with the local authority.
Property Rented by the Business
When sending employees out of state on shorter assignments or to a location at which you don’t plan to be doing ongoing business, hotels, corporate rentals or even vacation rentals are all suitable choices.
These types of rental properties are deductible only on business working days (i.e., a day in which a business activity occurred for four hours or more).
Book Through Hotel Engine
If you go the rental route, more and more businesses are using convenient, time-saving solutions like Hotel Engine to arrange their employees’ lodging needs for them.
Hotel Engine really comes in handy when you’re arranging lodging for a large group at the same time. Their Project Service team will handle your group booking for you and find a suitable hotel.
Convenient reporting tools also make it easy to keep track of your booking history for tax purposes.
Taxes are complicated in all areas of business, and doubly so when you’re involving multiple states and expenses for employees working far from home.
It’s a good idea to have a general sense of how it all works before you plan your next out-of-state project so that you can make the best business decisions and choose the options that will cost you the least over the long term while keeping your employees happy and comfortable.
Get started with Hotel Engine by signing up for your free account.
Audrey Fairbrother is the Content and SEO Manager at Hotel Engine. She spends her days writing about all things business travel, researching topics that are important to Hotel Engine’s audience and cultivating the company’s brand voice. When she’s not working, Audrey enjoys spending time with her family, and hiking in the nearby Rockies with her dog, Albie.