Ways to make tax compliance less of a nightmare for small business

Ways to make tax compliance less of a nightmare for small business

As Tax Day approaches, the question of time and money spent to comply with the U.S. tax code, particularly for small businesses, is a popular topic, with an unpopular response. Compliance costs for an employer with 1–5 employees range from $4,308 to $4,276 per employee, according to the chairman of the House Subcommittee on Economic Growth, Tax and Capital Access, Rep. Tim Huelskamp, R-Kan.

But, in the absence of major tax reform, some solutions do exist, experts told the subcommittee at an April 13 hearing. One important step for simplifying small business taxes is eliminating the complicated web of state laws for withholding taxes on nonresident employees, said Troy K. Lewis, CPA, chair of the AICPA’s Tax Executive Committee.

“As CPAs, we see, firsthand, small businesses on Main Street and their employees getting caught up in this web of inconsistent state income tax and withholding rules,” he said. One state may exempt a nonresident who works in the state for 15 days from income tax withholding, while another exempts nonresidents who work for 59 days. To point out how difficult compliance can be under this web, Lewis used an example of a real estate developer whose employee visits 20 prospective sites in 20 different states and spends less than a day in each state and who could be subject to state tax withholding in each of those states.

Unfortunately, he noted, the existing reciprocity collaboration between some states that border each other provides only patchwork relief, with two-thirds of the country not covered by such agreements. Agreements that do exist are “primarily geared toward nonresident employees who ordinarily commute a few miles a day to adjoining states.”

Lewis urged lawmakers to pass legislation that would provide overdue relief for this problem as soon as possible, noting that the Mobile Workforce State Income Tax Simplification Act of 2015, H.R. 2315, would have minimal financial impact on states. According to the revenue estimate for the bill, 18 states would, in fact, gain revenue. The bill would prohibit states from taxing most nonresident employees unless the employee is present in the state and performing employment duties for more than 30 days during the calendar year.

Rep. Mike Bishop, R-Mich., co-sponsor of the bill, echoed Lewis’s description of the complexity that is bewildering to employers and taxpayers. “It really is absurd,” he commented, observing that an employer may have to file as many as 50 Forms W-2 for one employee. Read more on the Journal of Accountancy.