By: Melissa Causer, Tax Supervisor
The number one scariest thing for business owners is tax filing according to a study done by the National Federation of Independent Business reported the Pittsburgh Business Times. Tax filing is always a tricky subject and gets more complicated at year end. It gets even more complicated when you’re a multi-state employer, but there’s often one simple thing every multi-state employer can do to get a handle on their unemployment and withholding taxes, and that is closing the accounts in states that file zeros.
After being on the business side of taxes for over 6 years, I’ve realized it’s not uncommon for businesses to leave their accounts open in states they’re consistently filing zero returns for. It might not seem like a big deal, but after tying in the unaccounted costs for time and potential fees, you could be costing your business more than what those zeros are worth.
I’ve been involved in many scenarios in the past in which not only the company I worked for, but also our clients were filing unnecessary zero returns. In one instance, after doing a review, I came to find that one client was filing zeros in at least 30 states since 2007! Most of the tax codes didn’t have liability for years and others never even had any liability.
Zero returns are a lot of work for the employer, the service provider, and the state. Employers can end up paying unnecessarily for the time an employee taxes to file the zero returns or for a provider to continue filing for states they do not need. No matter who is filing for your company, time is spent filing the zero returns in a variety of methods. Even after they’re filed, the state has to process and post the returns they receive. Since it is a zero return, there is no tax money benefit for the state which can delay recording that they received the return, which will result in the continuation of the receipt of unnecessary notices and penalties.
Of course, every state is different. There are a multitude of rules and regulations employers have to follow, requirements for filing tax returns, and depositing tax payments. How each of those are done can vary by each state that you have employees in. According to the Society of Human Resource Management (SHRM) article “The Perils of Multistate Employment”, every multistate employer should check the city and state’s withholding laws in which the employee will be working in before the employee actually begins work in that state since every location may have their own tax laws. It’s important to be cognizant of new employees, where they are working, and follow procedures accordingly to open your business in a new state.
SHRM also further explains in their Q&A article “Taxes: Multistate: If we have employees..” that there are a few things employers need to consider when setting up accounts in multiple states.
- “Not all states impose a withholding tax. The states that do not are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming and Washington.”
- “Some states have special reciprocal agreements with neighboring states. These agreements typically allow an employer operating in one state to withhold employees’ personal income tax for the state in which they reside.”
- “Last, an employer may need to be concerned with other withholding tax requirements. Some states have counties with county tax requirements or cities with local income tax requirements.”
Additionally, you should be cognizant of closing accounts with state agencies. When the work is finished in that city/state, or if you no longer have employees in those locals, you could be leaving accounts open when they don’t need to be or accidentally closing them prematurely. Some states automatically close accounts for you if you file a specific number of zero returns for multiple, consecutive quarters. Others do not. You can tell your service provider to stop filing for an agency, but if you don’t follow through closing the account with the state, you will still receive notices. So, why are some employers are hesitant to close accounts that have been consistently zero for? Well, there could be few reasons such as:
- They think they MAY have employees in that state again
- They think it’s difficult to close and reopen
- Some states require some type of authorization to “do business” in that state and they fear that they will have to re-certify. For example, a state may require a Certificate of Good Standing from a corporation’s state of domicile in order to give authority to do business in that state.
All of those reasons are justifiable; however, closing the accounts in which you’re filing zeros for at year end will help to reduce the paperwork for quarterly filings, reduce manual work for yourself or for your tax service provider, and reduce your costs whether it’s the charges you incur from your provider for filing returns or for the time your employees spend filing the returns in-house.
One thing you do want to make sure of is that you don’t close the account prematurely simply because doing so could create some timing issues. For example, the state of Wisconsin requires W2s within 30 days of closing the account. If the IRS hasn’t released their final draft of the W2, then you or your tax provider is unable to generate the W2 reports prior to year end.
Doing a periodic self-audit of your open tax accounts can be a great help to figure out which accounts you need, which ones you don’t and when you can close them. To perform the audit, ask yourself:
- How many employees do I have in different states?
- How many of those states have regularly had employees?
- Are there any state accounts that I’ve kept open but haven’t had employees for more than a year?
- What are my costs for continuously filing zero returns?
Though closing and re-activating your tax accounts is a pretty straight forward procedure, there could be additional factors you may need to consider. Beginning to ask yourself the questions above is just one way you can begin to figure out if it closing those unused accounts would be beneficial for you.
As we approach the end of 2013, it is a great time to close unneeded accounts. As mentioned, some states require W2s with the final filings, and these are being prepared at the same time as the final returns, so it is easy to comply. Review your state accounts, identify the last time you actually had any liability in those states, and work on getting them cleaned up (with the help of your tax provider), so you can start 2014 with a clean tax slate.