Compared with federal and state taxes, local taxation is much more complex, mainly because it can vary so widely from one jurisdiction to the next. Each location has its own set of regulations and requirements for collecting anything from local income taxes to various city and county fees.
To make things even more complicated, not all municipalities publish standardized forms corresponding to the taxes that they collect. Some payroll systems also lack built-in tools for automatically determining an employee’s current location as well as the applicable taxes they should withhold from their compensation based on where they work.
Add it all up, and it’s easy to see how keeping up with local as well as nonresident taxation can be challenging for employers, especially in the age of increasingly mobile and remote workforces.
Global Workplace Analytics estimated that work-at-home arrangements among the non-self-employed grew 11 times faster than the workforce as a whole from 2005 to 2018. Similarly, reliance on branch office employees and work-related travel also make it more difficult to ensure the proper withholding in every instance, unless you are relying on automated and well-integrated tax and payroll solutions.
What are the big challenges in local taxation?
There is considerable variance in the types and amounts of taxes levied by localities, and in how they’re reported. For example, as of August 2019, almost one-third of states allow for some form of local income taxes collected by cities and counties. Let’s take a closer look at Kentucky as one example.
Kentucky’s complex occupational license taxes
In addition to its state-level income tax, the Bluegrass State also has many city/county-specific occupational license taxes on businesses and individuals operating in those jurisdictions. While forms for such taxes are available online as required by state law, the state government’s official website still recommends contacting the relevant city or county government before doing any business there, as rates and requirements will vary by jurisdiction.
In 2017, Kentucky began accepting standardized forms for tax districts that collect taxes for a single district, and for the dual tax districts in six of its counties. That’s a major improvement from the previous practice where employers would have to manage different forms for hundreds of districts.
Development of its planned Standardized Multi-District Occupational License Form was ongoing as of 2019. At that time, the Secretary of State site still contained links to different local forms for the handful of counties collecting those taxes.
Other local tax issues: Lack of forms, manual work and no HCM integration
The Kentucky situation shows how challenging it can be to navigate local taxation—and that’s just for one of the 16 states. Other states might not provide standardized forms, requiring even more manual work to track everything down and perform the correct withholding. Moreover, HCM systems might not automatically know an employee’s jurisdiction and correct tax information. This can result in costly withholding errors for which employers may be held liable.
To simplify and improve the withholding process, CIC Plus provides an easy-to-use non-form local service that can be integrated into Workday. This solution uses an employee’s home and work addresses to determine local tax withholding and then passes them on to the payroll system.
Traveling employees and nonresident taxation
Systematically collecting and integrating such information is important not only for complying with local tax regulations, but also for keeping track of nonresident employees who may be subject to certain taxes. As more employees become mobile and remote, employers may struggle to stay on top of these tax situations.
In 2019, the Illinois General Assembly took up legislation that would collect income tax on nonresident employees, something many states already do. Because of such statutes, employees who live in one state but work in another, or who travel frequently between states for work, can create some complex withholding scenarios.
Adding to the complexity of nonresidency taxation, states define residency differently and may or may not have reciprocity agreements with each other. A reciprocity agreement eases the administrative burden of figuring out which local taxes should be withheld. In the absence of one, it may be necessary to weigh the requirements of each state in question to determine withholding. This process may entail calculating the number of days an employee was in a given state to see if they are considered a resident.
How to simplify local tax withholding and compliance
Rather than try to manage the fragmented and ever-evolving local tax landscape by hand, it makes sense to automate this task. Online withholding forms from CIC Plus can be auto-assigned to employees based on their home and work addresses. Our system is also continuously updated to incorporate the latest changes to tax forms from across the country, and our tools can be seamlessly integrated into your HCM solution.