what state are your employees in? - santa clara university · *”quick survey” conducted july...
TRANSCRIPT
What State Are Your Employees In?
Kim Malvicini, CEP, Vertex Pharmaceuticals
Nancy Mesereau, CEP, Morgan Stanley
Marlene Zobayan, CEP, Rutlen Associates LLC
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Agenda
Introduction
General Rules
– California
– New York
– Tristate area & other states
– Mitigating double taxation
Administration Challenges of Mobility Taxation
Questions?
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This presentation contains general information only and the respective speakers and represented firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and firms shall not be responsible for any loss sustained by any person who relies on this presentation.
Disclaimer
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RSAs, RSUs, Options and PSUs
Strive for compliance on all transfers from country-to-country, state-to-state and Expat assignments
Countries with 10 participants or less
– Ireland, Portugal, Sweden, Austria, Switzerland, Brazil, Netherlands, Spain,
Australia, Italy, Chile, Colombia and Mexico
Countries with up to 100 participants
– France, Canada and Germany
Countries with over 100 participants
– UK
Countries with over 1,500 participants
– USA – in over 25 states
Vertex Pharmaceuticals
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Most states follow federal rules on taxation of stock awards
– Some exceptions:
PA does not recognize ISOs and ESPP
OH withholding on disqualifying dispositions
Earned vs. recognized
– Earned over time
– Recognized at a specific point in time
Taxation is dependent on residency status
State tax credit may be available
General Rules
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Definition of Residency
Varies state by state
Possible to be resident of more than one state – but unlikely
Most states tax worldwide income of residents
Most states tax income of non-residents earned in that state
– Equity compensation earned over time
– Allocation of income may be required
– Applies to former residents and business travelers!
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Allocation of Income
Inconsistency in allocation methods; e.g.
– Workdays from grant to vest Georgia
New York
– Workdays from grant to exercise Arizona
California
– Exceptions Illinois - Five-year special rule
North Carolina - location of grant
Ohio - Degree of appreciation method
Most states do not have designated allocation methodology
– Default to Federal allocation rules?
There are 41
states in the U.S.
that charge an
income tax
plus
District of Columbia
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Resident : generally
– Individual present in California for other than temporary or transitory purpose
– Individual domiciled in California
– Presumption that every individual who spends 9 mo. or more of the taxable year in California is a resident
Non-resident: not a California resident
– Residents must leave California for employment must be absent for at least 546 days
Visits totaling less than 45 days during that time are disregarded
Residents taxed on worldwide income
– California does NOT recognize Federal tax treaties
Non-residents taxed on income earned in California
California Residency Rules
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California – Taxation of Equity Awards
Move to California
– Granted while a nonresident, taxable while a resident
– Taxed on worldwide income
– Subject to state tax credits
Move out of California
– Granted while a resident, taxed while a nonresident
– Income taxable to the extent earned in California; one reasonable method is time
Stock option examples and audit manual use time between date of grant to date of exercise
RSUs – guidance is to use time between date of grant to date of vest
Business travel to California
– No de minimis
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Resident: generally
– A permanent place of abode for more than 11 months & 184 days presence
– Individual domiciled in New York (some exceptions apply)
Employment in New York
– Convenience of employer rule
Residents taxed on worldwide income
– New York does NOT recognize Federal tax treaties
Non-residents taxed on sourced income
– Watch for convenience of employer rule
New York City tax
New York Residency Rules
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New York – Taxation of Equity Awards
Move to New York
– Granted while a nonresident, taxable while a resident
– Taxed on worldwide income
– 100% of income taxed in New York
– Subject to state tax credits
Move out of New York
– Granted while a resident, taxed while a nonresident
– Income taxable to the extent earned in New York
– Use time between date of grant to date of vest
Business travel to New York
– Employer compliance 14 days (some exceptions)
– Does not apply where earned in prior year and paid current year
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Residents taxed on worldwide income
Non-residents taxed on sourced income
Equity sourcing:
– New Jersey does not have specific equity allocation guidelines
– Connecticut sourcing (options) is from first day of year of grant to last day in year of exercise
Business travelers
– Connecticut: 15 days de minimis
– New Jersey: de minimis based on withholding allowance
New Jersey & Pennsylvania reciprocal agreement
New Jersey and Connecticut
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Other State Implications
Not all states have rules regarding allocation of income from equity awards
Differences in allocation methods may result in double taxation – Illinois
– North Carolina
– Ohio
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Ways to Mitigate Double Taxation
State credits
– If income is subject to tax in more than one state, a tax credit may be available
Reciprocal agreements
– Usually exempts residents of one state from tax in the other (work) state
– Common in east coast and Midwest
– Tristate area does NOT have reciprocal agreements between the 3 states
Example, work in NY, live in NJ
Employer withholding in NY
File non-resident tax return for NY reporting only NY sourced income
File resident taxes in NJ reporting worldwide income and claim credit
– Read the reciprocal agreement before applying it!
There are reciprocal agreements which cover other taxes (e.g., sales tax) but not income tax
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Jane was a resident of State A when the RSU was granted
Jane moved to B halfway through the vesting period
Jane was a resident of State B when the RSU vested – Gain is $1,000
Both A and B source the RSU based on days from grant to vest
State Tax Credit – General Example
Example 1: A: $500 X 5% = $25 B: $1,000 X 9% = $90 Pay A $25 Pay B $65 ($90 - $25) Total tax: $90
Example 2: A: $500 X 9% = $45 B: $1,000 X 5% = $50 Pay A $45 Pay B $25 ($50 - $25) Total tax: $70
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Information Needed for Each State
How are stock awards taxed?
Is the employee a resident? Where does the employee work?
Is withholding/reporting required?
– Granted when resident, taxable when nonresident
– Granted when nonresident, taxable when resident
Do any of the answers vary depending upon the other state of residency?
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Administrative Practices and Considerations
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Mobility is both a domestic and international challenge
Majority of respondents use a third party to assist with calculating
tax for mobile employees
Various processes are used for withholding and reporting tax on
equity compensation
There is room for improvement in employee education
Insights from Morgan Stanley/NASPP Mobility Survey*
*”Quick Survey” conducted July 2014 on NASPP website, resulting in 298 qualified responses from
NASPP members from issuer companies involved in stock plan administration.
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Tracking of long-term, permanent, and dual tax jurisdiction mobile employees is most common among companies surveyed.
Most Companies Have >200 Mobile Employees
NUMBER OF MOBILE EMPLOYEES1 TRACKING OF MOBILE EMPLOYEES2
7%
7%
14%
57%
16%
10%
7%
12%
56%
15%
Less than 50
51-100
101-200
201-500
More than 500
11%
15%
41%
41%
49%
13%
14%
69%
55%
46%
Executives only
Business travelers
Employees on long-termwork assignments
Permanent transfers
Employees who work in onetax jurisdiction and live in
another tax jurisdiction
1. How many mobile employees do you have? 2. Which of the following categories of “mobile” employees do you track and withhold taxes?
Global employees Domestic employees
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One-third of respondents mention employees are confused about tax consequences related to their mobility. Only 4 in 10 companies provide employee education.
Opportunity: Better Employee Education
42%
58%
35%
2%
63%
30%
2%
68%
They are confused
They have an excellentunderstanding
They have someunderstanding
Global Employees Domestic Employees
COMPANIES PROVIDING EDUCATION1 EMPLOYEES UNDERSTANDING OF TAX CONSEQUENCES2
1. Do you provide education to your mobile employees? 2.How well do you think your mobile employees understand the tax consequences related to their mobility?
Yes
No
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Outsourcing is a Popular Choice for Global Withholding and Reporting Equity Income
PROCESS FOR WITHHOLDING AND REPORTING EQUITY INCOME FOR MOBILE EMPLOYEES
1. What is your company’s process for withholding and reporting equity income for mobile employees who have provided services in multiple jurisdictions during the life of an equity award?
6% 6%
18% 5%
4%
3%
7%
7%
34%
29%
30% 50%
Domestic Employees Global Employees
Prepare calculations internally to properly apportion the withholding and reporting obligations based on local regulations
We have implemented a third-party automated solution to assist with this task
We have implemented an internal automated solution to assist with this task
We don’t comply
Outsource preparation of tax withholding calculations to a tax consultant
Not applicable
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About half of respondents mention no change to the handling of taxation of equity compensation for mobile employees.
Equity Compensation/Administrators are Leading the Effort
LEVEL OF RESOURCES
1%
1%
11%
40%
47%
Decrease significantly
Decrease somewhat
Increase significantly
Increase somewhat
No change
10%
0%
1%
21%
29%
39% Equity Compensation /
Stock Plan Administration
Human Resources
Finance/Tax
Legal
Audit
Other
FUNCTIONAL GROUP
1. In the next twelve months, please indicate level of resources your company plans to dedicate to the handling of taxation of equity compensation for mobile employees. 2. Which functional group within your organization is leading the effort for taxation of mobile employees?
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The “mobile” population is growing
Timing of the tax event for exercises is controlled by the participant
Frequent vestings of restricted awards make planning more
complex and necessitate automated processes
Risk of over- or under-withholding for “Sell to Cover” transactions
Explaining details of taxes to the participant
Challenges for the Administrator/Broker
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Focus on transaction processing shifting to real-time
calculation and withholding of taxes
– Reduce or eliminate tax adjustments after transactions have settled
– Comply with requirements to remit to tax authorities promptly
– Improve the participant experience
Timely, accurate data from multiple functional groups and
systems required
Data and timing
STOCK PLAN DATABASE
BROKERAGE SYSTEM
PAYROLL(S) GLOBAL TAX SPECIALIST
EMPLOYEE TIME
TRACKING HRIS
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Provides a single source for taxation of all forms of compensation,
including cash and deferred compensation
Mobility service models may be adaptable for unique company
requirements and tax policies
Solves the state and local tax challenges
– State unemployment and/or disability insurance (SUI/SDI)
– Tax rates with different YTD limits from FICA
– Progressive state rates
– Local jurisdictions requiring withholding
A Mobility Program May Solve other Tax Challenges
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Assess impact of mobility program on plans and practice
– Award types: options, awards, cash
– Transaction methods; payment of proceeds
Document all processes/procedures, including exception
handling and error processing
Agree on ongoing ownership of mobility program
– Roles and responsibilities
– Maintenance of data and systems
– Allocation of costs and savings
Communicate with or inform participants Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal
advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for legal matters. CRC 1519508 07/2016
Implementing and Maintaining Your Mobility Program
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Questions?
Kim Malvicini
Tel: 617-961-7929
Nancy Mesereau
Tel: 646-536-0301
Marlene Zobayan
Tel: 650-868-9282