Arkansas Administrative Code
Agency 006 - Department of Finance and Administration
Division 05 - Division of Revenues
1998-1 - Comprehensive Corporation Income Tax Regulations
Rule 26-51-713 - PAYROLL FACTOR
Rule 1.26-51-713 - Payroll Factor Generally

The payroll factor of the apportionment formula for each trade or business of the taxpayer shall include the total amount paid by the taxpayer in the regular course of its trade or business for compensation during the tax year. Leased employees' salaries should be included in the payroll factor of the taxpayer which pays the salaries and issues the W-2 forms.

The total amount paid to employees is determined upon the basis of the taxpayer's accounting method. If the taxpayer has adopted the accrual method of accounting, all compensation properly accrued shall be deemed to have been paid. Notwithstanding the taxpayer's method of accounting, compensation paid to employees may, at the election of the taxpayer, be included in the payroll factor by use of the cash method if the taxpayer is required to report such compensation under that method for unemployment compensation purposes.

The compensation of any employee on account of activities which are connected with the production of nonbusiness income shall be excluded from the payroll factor.

The term "compensation" means wages, salaries, commissions and any other form of remuneration paid to employees for their personal services. Payments made to an independent contractor or any other person not properly classifiable as an employee are excluded. Only amounts paid directly to employees are included in the payroll factor. Amounts considered "paid directly" include the value of board, rent, housing, lodging, and other benefits or services furnished to employees by the taxpayer in return for personal services, provided that such amounts constitute income to the recipient under the federal Internal Revenue Code. For those employees employed in foreign countries, the determination of whether such benefits or services would constitute income to the employees shall be made as though such employees were subject to the federal Internal Revenue Code.

The term "employee" means any officer of a corporation, or any individual who, under the usual common-law rules applicable in determining the employer-employee relationship, has the status of an employee. Generally, a person will be considered to be an employee if he is included by the taxpayer as an employee for purposes of the payroll taxes imposed by the Federal Insurance Contributions Act; except that, since certain individuals are included within the term "employee" in the Federal Insurance Contributions Act who would not be employees under the usual common-law rules, it may be established that a person who is included as an employee for purposes of the Federal Insurance Contributions Act is not an employee for purposes of calculating the payroll factor.

The denominator of the payroll factor is the total compensation paid everywhere during the tax year. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is protected from taxation, for example, by 15 U.S.C. § 381, is included in the denominator of the payroll factor.