As states become more desperate for new revenue streams, it is important to know the rules surrounding how to withhold state taxes from your employees when they live and work in different states. Generally, an employer is expected to withhold taxes for any state in which the employee works. If employees travel over state lines to perform work in another state, this could give rise to a taxable presence (Nexus) in that state; and you may be required to withhold taxes for that employee in that state. This depends on the state and any other presence your business may have in that state.
How Does Your State Handle Withholdings?
More than half of the states don’t have any guidelines as to handling nexus, therefore it is up to the business to withhold taxes from non-resident employees. Other states look to the number of days an employee is working in that state. For instance, Arizona considers an employee that works more than 60 days in that state to have a taxable presence, while New York is 14 days. Some states look to the dollar amount of earnings while in that state. Idaho is $1,000 or more, Minnesota is $10,300 or more.
State Reciprocity Agreements
In 2015, the U.S. Supreme Court ruled against double-taxation. The same earnings may not be taxed in more than one state. Without a reciprocal agreement, employees could be required to file a no-resident tax return and remit tax in their work state, and will receive a credit on their resident state tax return for taxes paid to the other state.
Some states have reciprocity agreements with other states to ease the burden to withhold payroll taxes for non-resident employees. Illinois, Indiana, Iowa, Kentucky, New Jersey, Ohio, Maryland, Minnesota, Michigan, Montana, North Dakota, Virginia, West Virginia, Pennsylvania, District of Columbia and Wisconsin all have reciprocal agreements with certain other states. This means there is an agreement between states that an employee who works in one state and resides in a neighboring state is only required to pay in state withholding to the state in which they live. In many of these situations employers are not required to register for payroll taxes in the resident state but can do so as a courtesy to the employee. Employees must fill out and notarize a form exempting them from withholding in their work state. This form is typically filed with that state.
- Wisconsin has reciprocity agreements with three other states; Illinois, Kentucky and Michigan. Employees who work in one of these states, but are residents of another one of these states will not be taxed on their salaries, wages, commissions, etc.
- Indiana shares reciprocity with five states: Kentucky, Michigan, Ohio, Pennsylvania and Wisconsin. All earnings of an employee who resides in Indiana but works in any of these 5 states must report wages as earned in Indiana. Conversely, residents of Kentucky, Michigan Ohio, Pennsylvania and Wisconsin who have Indiana income, need only pay state income tax in their resident states. Residents of these other states must fill out an exemption certificate that will be filed with the state of Indiana. And, assuming all other requirements are met (no other Nexus), the Indiana business entity would not be required to register or file withholding taxes in any of these other states.
- Missouri has no reciprocity with any other state. Therefore, a firm in St. Louis with employees that travel across the border to perform work in Illinois may be required to file and remit Illinois income tax withholding for those employees.
Mobile Workforce State Income Tax Simplification Act
There is a bill that has passed the House of Representatives, called the “Mobile Workforce State Income Tax Simplification Act of 2017”. This bill has yet to be voted on by the Senate. The bill would prohibit states from imposing income tax withholding obligations on employers unless an employee is present and performing services in that state for more than 30 days during the calendar year. The act excludes certain professions from this relief. (i.e. Professional athletes, professional entertainers, and certain production employees.)
How DHJJ Can Help
If you have employees that cross state lines and have questions on how to handle their withholdings, please contact DHJJ’s State and Local Tax group (SALT).
DHJJ’s State and Local Tax (SALT) group provides research for their clients and helps figure out the best tax strategies for businesses and their owners.