The NASPP Blog

Domestic mobility can be as complex as international mobility, but it certainly gets less press. With state governments dealing with budgetary difficulties, state tax authorities will be looking to capture as much “lost” tax revenue as possible. There are many situations where an individual may be required to report income and pay taxes in one or more states other than their state of residence, and stock option income is no exception. Most states follow federal income tax treatment for equity compensation, but only some specifically address how equity compensation should be sourced when mobility is an issue. For this reason, it really is best to get tax advice before creating a policy on domestic mobility.

Identifying Mobile Employees

There are three main situations that can lead to equity compensation being sourced to more than one state. The first, and probably easiest, is a permanent move made by an employee or former employee. When an employee or former employee moves from one state to another, you generally only need to assess the income sourcing once and then apply it to equity compensation going forward. Next on the list are employees that work outside their state of residence. This is most likely in the New England states where commuting across state lines can be quite common. Finally, there are employees who perform services for the company in more than one state. These situations can be the most challenging for stock plan mangers not only in determining compliance, but also in simply obtaining the travel information. Unlike with moves or permanent transfers, the details surrounding business trips or temporary assignments may not be evident in standard employee demographic details and must be communicated to the stock plan management team separately.

Sourcing Issues

When it comes to equity compensation, the key to handling domestic mobility is identifying when your company has an obligation to report or withhold on income from stock plan transactions in more than one state, or in a state other than your employee’s state of residence. Once that is established, the next step is to understand how each state sources the income. In many cases, the sourcing is between the grant and the exercise date for options (or vesting date for restricted stock). However, some states only consider residency at grant or at exercise and some completely have unique parameters.

Just like with international mobility, there will likely be situations of double taxation. States generally tax residents on all equity income, regardless of where it was earned. Alternatively, many states will also tax non-residents on equity income considered to be earned in that state. To address double taxation, there may be tax credit available to employees in either their state of residence or the non-residence state where equity income is earned. Additionally, some states have specific reciprocity agreements between them to avoid double taxation. It may be possible for your company to rely on these arrangements when reporting and withholding on equity compensation.

Steps to Compliance

A great way to tackle domestic mobility compliance is to start with the most visible (i.e. riskiest) and most common situations. Check to see if you have particular locations or employee segments where mobility is more common and determine which types of sourcing issues you are dealing with. Once you have an idea of what mobility issues you are going to address first, get informed on the sourcing and taxation requirements for the states in question. You can find information on our site in the State and Local Tax portal, but before making any decisions, consult your company’s tax advisor. Once you’ve made decision on how your company will handle specific situations, document a clear policy and run it past your auditor for confirmation.

-Rachel