Are Your Tax Processes Ready for the Return of Business Travel?

Business travelers are often the most ignored group of mobile employees as far as tax compliance is concerned. This was confirmed by the NASPP/Deloitte Tax 2022 Equity Administration Survey, which found that only 25% of respondents track global business travelers and only 19% track domestic business travelers. These percentages are significantly lower than the percentage of respondents who are tracking assignees, transfers, and remote workers.

The COVID-19 pandemic curtailed business travel significantly for a couple of years, which allowed business to table compliance for business travelers during the pandemic years. However, business travel is expected to return to (and maybe exceed) 2019 levels in 2023 according to several surveys, including one from Morgan Stanley. Anecdotally, my clients saw a significant rise in the number of business trips their employees were making from 2021 to 2022.  

Business Imperative

For 2023, compliance with the payroll tax requirements for business travelers is more imperative than ever for several reasons. First, as mentioned in my October 2022 Blog on mobility, “How Do State Taxes Apply to Mobile and Remote Workers?,” state tax authorities are focusing on remote worker taxation. Business travelers can easily be caught up in a remote worker payroll audit as there are similarities between the two groups. In particular, remote workers who work temporarily in another state without establishing tax residency are generally taxed in the same way as business travelers.  

Localities are also focusing on nonresident worker tax compliance. For example, in December 2022, Kansas City, Missouri, published new regulations for its Earnings and Profits Tax legislation which include eleven pages of guidance and examples relevant to nonresidents including business travelers working in that locality.

Moreover, remote workers who relocated to another state during the pandemic may return to their prior office locations for meetings. This is particularly likely for executives who moved to other states but may visit the headquarters for meetings. California is known for comparing the named executives in SEC filings of California-based companies with personal tax returns received on the assumption that those executives would travel to headquarters for meetings. Like most states, California does not have a de minimis exception for a minimum number of days worked in the state. Individuals can be taxable even for one day of work in California, and their employers are required to apply California income reporting and tax withholding.

Global vs. Domestic Travel

Ironically, even though the Equity Administration Survey found that there is higher compliance for global business travelers, the associated tax issues can be less significant for global travelers than domestic ones. This is due to the extensive tax treaty network that the United States has established. The United States has negotiated treaties with almost 70 countries. While not every treaty is the same, most would exempt business travelers who meet the criteria of the relevant treaty.

Most states, however, do not have equivalent inter-state agreements and an employee who travels to another state for one day of work (including for meeting or training) may be subject to tax in that other state on the income earned for that day.

There are reciprocal agreements between some neighboring states, particularly in the northeast, that allow residents of one state who work in another to pay tax only to their resident state. Typically, the employee should complete a form stating their nonresidence in the work state.

Team Effort

As business travelers do not change their home or office addresses in the HRIS system, they are the most difficult of all mobile employee categories to track. Companies use a variety of methods to track travelers including the following:

• Self-certification
• Time sheet reporting
• Reports from the travel database / travel vendor
• Expense accounts
• Mobile phone tracking.

Note that with the proliferation of labor and privacy laws regarding employee tracking for remote work, legal advice should be sought before implementing any automated tracking system.

Furthermore, unlike other types of mobile employees, business travelers do not switch to a new payroll location. Therefore, the income allocation and associated payroll compliance apply to both payroll (salary), equity compensation, other benefits and long-term incentives. This makes business traveler compliance truly a team effort.

Those companies who have not yet started exploring business traveler compliance should begin by reviewing their executives’ travel as soon as possible. We expect that this year there will be a particular focus on any executives outside the headquarters state who are expected to travel to headquarters for meetings.