Generally, the State pays for expenses incurred when an employee travels on official State business. In some instances, these expenses are reportable as employee income. The employee’s personal income tax liability for these travel expenses can be negligible, such as the amounts associated with meal allowances for day trips. However, in certain instances, the employee’s personal income tax liability can be substantial. This generally occurs when an employee travels repeatedly to the same location over an extended period for official State business.
If the head of an agency has not properly designated an employee’s official station, the employee will, as outlined below, likely incur substantial tax liabilities with respect to reimbursement of travel expenses. This tax liability can also be unexpected for the employee, if the agency does not properly report the taxable reimbursements as income contemporaneous with payment to enable the State to timely withhold the taxes. In cases where an agency does not timely report the taxable reimbursements as income, the State may issue up to three years of amended W-2 forms reflecting an increase in supplemental income upon which the employee will have to pay taxes, interest and, potentially, penalties that may be substantial.
Business Units are responsible for (i) understanding the personal income tax implications associated with an employee’s official station designation, (ii) understanding the consequences of reimbursing employees for travel expenses incurred by an employee in the vicinity of his or her “tax home,” and (iii) monitoring official station designations to prevent employees from unexpectedly incurring substantial tax liabilities.
This section provides guidance for Business Units to understand:
The distinction between a tax home and an official station;
The tax consequences of travel reimbursements, considering the employee’s tax home and official station; and
- Properly designate employees’ official stations.
Monitor employees’ tax homes;
Monitor employees’ official stations; and
In exceptional cases only, designate an official station different from an employee’s tax home and advise the employee that there will be tax consequences resulting from such designation.
As used in this section, “reimbursement” is intended to include:
Travel expenses paid by the employee, such as meals, lodging (where not charged to a State travel card), parking and tolls, as well as mileage allowances for use of a personal vehicle; and
Travel expenses paid directly by the State, such as charges to a State travel card, or use of a State owned resource, such as a vehicle or lodging.
Typically State policy precludes reimbursement to employees for certain travel expenses, including:
Expenses for meals and lodging incurred when an employee is in the vicinity of his or her official station; and
A. DISTINCTION BETWEEN TAX HOME AND OFFICIAL STATION
Before we discuss the tax implications associated with travel, it’s important to understand the distinction between an employee’s tax home and the employee’s official station.
Tax Home – Generally, an employee’s tax home is the area of the employee’s principal place of employment, regardless of where the employee maintains his or her residence. An important purpose of identifying a tax home is to establish when an employee’s travel expenses are subject to taxes.
Official Station – Generally, an employee’s official station is his or her usual work location, regardless of where the employee maintains his or her residence. The head of an agency designates an employee’s official station. An important purpose of designating an official station is to establish when an employee’s travel expenses are eligible for reimbursement.
As stated above, an employee’s tax home and official station are generally both located where the employee usually works. However, there is a fundamental difference in how the locations for the tax home and official station are determined. Under Internal Revenue Service (IRS) rules, the location for a tax home is generally an objective determination based on where an employee principally works. While the location of an employee’s official station should, in almost all cases, be the same as the employee’s tax home, in rare exceptions the head of the agency has the ability to make a subjective determination to designate an employee’s official station at a location other than the employee’s tax home. This designation would make the employee eligible to receive reimbursements for travel expense incurred in the vicinity of the employee’s tax home, but will subject the employee to taxes with respect to such reimbursement.
The head of the agency should determine an employee’s tax home before designating the employee’s official station. As discussed in the “Tax Implications” section below, when the head of an agency designates an official station that is not the same as the employee’s tax home, there may be adverse tax consequences to the employee from the reimbursement of travel expenses, as the dollar amount of virtually all travel expenses (with the exception of transportation expenses in some cases, as discussed later in this document), including hotel costs and per diems, is taxable as income to the employee.
Exhibit A includes a chart the head of the agency can use to help determine an employee’s official station and ensure proper reporting of taxable income, where applicable.
TAX CONSEQUENCES OF TRAVEL REIMNBURSEMENTS – OFFICIAL STATION VS. TAX HOME
The following sections provide important information about an employee’s tax home, the tax implications associated with the IRS’s rule regarding temporary assignments (sometimes referred to as the One Year rule), and Business Units’ responsibilities regarding these matters.
Employee’s Tax Home – General IRS Rule
Determining the Tax Home
While IRS guidelines identify a number of factors that can affect the determination of an employee’s tax home, for a State employee (other than certain “field” employee with no regular work location, but for whom, dependant on the specific circumstances, both the tax home and official station may be his or her personal residence) the controlling factor generally will be the place where the employee spends more work time than he or she spends at any other work location. If an employee spends equal time at multiple locations, contact the Bureau of State Expenditures Help Desk at (518) 474-4868 for assistance in determining the employee’s tax home.
In most cases, an employee’s official station will also be his or her tax home. However, an employee’s job duties may result in a change to the employee’s tax home after the head of the agency has designated the employee’s official station. For example, if an employee is assigned to a new primary work location for a definite period of time that is not temporary, or for an indefinite period of time expected to last for more than one year, the location of the new assignment will become the employee’s new tax home (see the section below about the IRS rules regarding temporary assignments). This IRS requirement applies even in cases where the head of the agency does not change the employee’s official station in light of the change in job duties, because it is expected that the employee will eventually return to his or her original work location.
Taxable Travel Expense Reimbursement
Normally, reimbursement for business travel expenses is not taxable to the employee. For example, as discussed below, reimbursement for transportation expenses between work locations is not taxable. However, under IRS rules, reimbursement of travel expenses generally is taxable to the employee where an employer reimburses the employee for travel expenses (other than transportation expenses between work locations) incurred while the employee is in the vicinity of his or her tax home. The State is required to include such reimbursements in the income reported on the employee’s W-2 and include such amounts in the calculation of tax withholdings. The employee is, in any event, responsible for paying appropriate taxes.
IRS Rule for Temporary Assignments – Tax Implications
The subsections below discuss the potential impact on the location of an employee’s tax home due to a change in an employee’s assigned work location, and the expected duration thereof. It also includes information regarding the potential taxability of travel reimbursements.
Duration Expectation – One Year or Less
Generally under IRS guidelines, there is no change in an employee’s tax home when he or she is assigned to a new work location on a temporary basis. If employment at a new single work location is realistically expected to last (and does in fact last) for one year or less, the employment at that work location is temporary in the absence of facts and circumstances indicating otherwise, and the employee’s tax home has not changed. The employee is considered to be traveling “away from home” when traveling to that work location, and can generally be reimbursed for travel expenses at the new work location without tax implications (with limited exceptions such as non-overnight meals).
Duration Expectation – More Than One Year Expectation
If employment at a single work location is realistically expected to last for more than one year, or is for an indefinite period such that there is no realistic expectation that employment at that location will last for one year or less, the employment at that location is not temporary – even if the work at that location does not exceed one year. Any travel expenses paid or reimbursed are treated as supplemental wages, and are subject to taxes. There are exceptions for certain transportation expenses, as discussed below.
Duration Expectation – One Year or Less Changes to More Than One Year
If employment at a single work location is realistically expected to last for one year or less, but at a later date is realistically expected to exceed one year, in the absence of facts and circumstances indicating otherwise, the employment is treated as temporary until the date that the realistic expectation changes. After that date, the employment is treated as not temporary. The employee’s tax home changes to the new work location when the reasonable expectation changes. Any expenses paid or reimbursed for travel to that location for time periods after the date the realistic expectation (and, therefore, the location of the employee’s tax home) changes are treated as supplemental wages and are subject to taxes. There are exceptions for certain transportation expenses, as discussed below.
Travel Actually Lasts More Than One Year
Whether or not employment at a work location is expected to last for more than one year, employment at that location after the expiration of that year is not temporary, and the work location becomes the employee’s tax home. Any expenses paid or reimbursed for travel to that location after the expiration of one year are treated as supplemental wages and are subject to taxes (IRS Revenue Ruling 99-7). There are exceptions for certain transportation expenses, as discussed below.
Transportation Expenses Exception
Even when travel expenses are generally taxable as outlined above because an assignment is considered not temporary under the IRS rules (and, as a result, the employee’s tax home changes without a corresponding change to his or her official station), any payment or reimbursement of actual transportation expenses (e.g., planes, trains, buses or automobiles) for necessary travel for legitimate business purposes between the employee’s official station and the work location that has become the employee’s tax home, will not be taxable.
In other words, if an employee is assigned indefinitely to a new work location that becomes his or her tax home, but the employee for legitimate business reasons is required periodically, or regularly, to spend time at his or her former work location, the payment or reimbursement of actual transportation expenses for each necessary trip between the two work locations will not be taxable income. The example below illustrates a travel situation where transportation payments or reimbursements would not represent taxable income.
However, payment or reimbursement of actual transportation expenses for travel for reasons other than legitimate business reasons between the employee’s former work location and new work location will generally be taxable income. The example below illustrates a travel situation where transportation payments or reimbursements represent taxable income.
Travel Between Work Locations
Reimbursement for transportation expenses associated with necessary business travel between work locations, even if incurred within the vicinity of an employee’s tax home, is not taxable. Thus, reimbursement for transportation expenses incurred in traveling between one work location and another, or for travel to a business meeting away from the employee’s regular work location, would not be taxable.
The head of an agency, upon hiring, reassigning or promoting an employee, must designate an official station. This designation must be based upon the best interests of the State and not on such considerations as the employee’s residence. The agency head needs to be able to justify an employee’s official station designation in all cases as being in the best interests of the State.
The Office of the State Comptroller (OSC) has the right to review any State employee’s official station designation. If any designation is found to be inconsistent with OSC Regulations (found at 2 NYCRR § 8.2), OSC will take appropriate action.
The official station should, in virtually all cases, be the employee’s tax home. For most State employees, this is the location where it is reasonably expected that the employee will spend more time actually working than any other location. There is an exception for certain “field” employees who do not have a regular work location and whose official station and tax home may, dependant on the specific circumstances both be their residences. An agency head’s designation of an official station other than an employee’s usual work location should be considered only in extraordinary or emergency situations.
The chart in Exhibit A may be helpful in designating an employee’s official station.
As discussed in the “Tax Implications” section above, if an employee’s official station is not the employee’s principal place of employment, there may be adverse tax consequences to the employee from the reimbursement of travel expenses.
Business Units should continuously monitor each employee’s work location and pay particular attention to any employee who is receiving travel reimbursements for a majority of the days he or she actually works (i.e., excluding holidays and leave days), since this is a strong indication that the employee’s primary work location (tax home) may be different from the employee’s official station. The sections below discuss the monitoring procedures Business Units should have in place specific to employees’ tax homes and official stations.
To effectively monitor employees’ tax homes, the Business Unit should start by familiarizing itself with the IRS temporary assignment rule summarized above and with the tax implications of that rule. For more detailed information, consult IRS Publication 463, available on the IRS website at www.irs.gov.
The Business Unit should continuously identify employees who are assigned to single work locations away from the location that had historically been their tax homes. Once identified, the Business Unit should monitor the length of time each employee is assigned to a single work location away from the location of his or her tax home at the time of assignment, and the travel expenses associated with this assignment. In applying the IRS temporary assignment rule, the Business Unit is responsible for the following:
Periodically review each employee’s work assignment location to determine whether the employee’s actual or expected length of time traveling to that location, in light of the IRS temporary assignment rule, has changed to more than one year. If it has, and the head of the agency does not change the employee’s official station to the location of that assignment, advise the employee in writing of the fact that the IRS temporary assignment rule will result in adverse tax implications, and that the employee may wish to discuss the matter with a tax advisor.
Consistent with the standards outlined above, ensure that those taxable travel expenses that are paid to or on behalf of an employee are reported to the OSC Payroll Office, so that they may be properly included in the employee’s wages and subjected to tax withholdings. To ensure this happens, timely report taxable travel reimbursement income to the Business Unit’s payroll officer, who can refer to OSC PayServ guidelines for assistance. The Business Unit should advise the employee that his or her net payroll check will likely be lower as a result of the additional taxes withheld.
Lack of monitoring may result in substantial, unexpected tax liabilities for employees, and may necessitate the amending of both prior year Wage and Tax Statements (W-2) and employees’ personal income tax returns.
The Business Unit should periodically review employees’ official station designations. Specifically, when an employee is assigned to a work location other than his or her official station, Business Units are responsible for the following:
Exception – Designate Official Station Other than Tax Home
Where it is realistically expected that an employee’s assignment to a work location other than his or her official station will last more than one year, and that the employee will return to his or her original work station after the assignment is complete, it may be in the best interest of the State to continue the employee’s original official station designation during the period of assignment to the alternate work location.
Nevertheless, for tax purposes, the IRS temporary assignment rule still applies. Accordingly, while it could be in the best interest of the State to retain the employee’s original official station (and therefore pay for his or her travel expenses in connection with work at the alternate location) the employee should be advised in writing from the outset that there will likely be adverse tax consequences.
In all cases where it appears that application of the IRS temporary assignment rule may, or will, result in adverse income tax consequences for the employee, the Business Unit should immediately alert the employee in writing and advise the employee to consult with his or her tax advisors for more detailed information on the employee’s specific circumstances. The Business Unit should also take steps to report taxable travel reimbursements as supplemental wages for the employee, upon which taxes will be withheld.
If you have any questions, or would like to discuss a particular travel situation not discussed in this section, please contact the Bureau of State Expenditures Help Desk at (518) 474-4868.
IRS Topic 511
IRC Section 162
IRS Publication 15
IRS Publication 463
2 NYCRR 8.2
IRS Revenue Ruling 99-7