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Taxing Money from Trips and the Penalty Issue
When people travel for business within the United States and outside of the United States, there are tax laws to consider. Employers and employees often do not know, understand, or apply the laws concerned. In the past, workers used to travel and there was no issue, no tax concerns and nobody realized they could be taxed for income earned there. Employers were required to withhold and report income.
If you are an Arizona employee and you travel to another state like California, or New Mexico, or even New York, for work, and you work there say for weeks or months, you may need to pay income tax in Arizona or the state your worked in for the income you earned while working in that state. Let’s suppose the state you come from is a state that with no income tax.
Some states with no income tax include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Other states have income taxes on income, but do not tax wages and these states include Tennessee and New Hampshire. To be clear, the distinction is that they both tax dividends earned, as well as interest but they do not assess income tax on wages.
Another issue is if you earn a trip from a company, as is often a popular incentive with sales employees, you have to report that trip and pay taxes on the benefit. A good rule of thumb for how much you will have to pay for the trip is about one third of the cost of the trip is paid in taxes. More information can be found about this on the IRS website: https://www.irs.gov/taxtopics/tc511
Companies may have to deal with multi-state laws and regulations if they have workers in a variety of states and will need to keep themselves informed. Another good source of information is looking at https://www.usa.gov/taxes where you can find out about business taxes and more.
To find out about the tax obligations in your state, the Small Business Administration has put information together in a helpful and accessible way for laymen to comprehend. This can be found at https://www.sba.gov/business-guide/manage-your-business/pay-taxes#section-header-3
On this website, you can look at the regulations in your state. For Arizona, you put the state in the toolbar, and it will direct you to https://www.aztaxes.gov/Home/Login?aspxerrorpath=/Security/Login.aspx
The US Department of Labor is also concerned with labor laws and paying employees appropriately for travel time. More information can be found at the Department of Labor website. https://www.dol.gov/general/topic/workhours/traveltime
Employers need to know that they must register in any state where they are conducting business or having employees perform work. Employers may not realize that this applies whether or not their company has a physical presence there. Another cost that can be incurred is having tax professionals from different states review your tax burdens and ensure you are completely in compliance with the local laws. This may need to be a cost employers pass on to their customers to maintain profitability. Employees need to consider the potential negative tax impact upon them and what tax protections their employers have in place to alleviate some of this burden. This can be especially bad for residents in states with no state income taxes like Florida or Texas, who do work in states who do tax income.
In order to stay in compliance, companies may hire specialists to help them facilitate these burdens and responsibilities. One procedure many companies adopt is putting processes in place every time they conduct business in a new state so everyone who should be notified is.
Lastly, keeping very accurate records and data is key so that any trips whether for business in other states, or given as rewards, are tracked and compensation is recorded for sales reps, executives and all staff who travel.
Even though traveling between states for business is a compliance headache in some ways, it is an integral part of our global economy and companies must develop processes to offset risks involved.
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