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 Post subject: Withholding for out of state employees
PostPosted: Thu Nov 04, 2010 9:03 am 
Board Newbie

Joined: Tue Jan 27, 2004 3:04 pm
Posts: 8
Hi All,
I hope this is a easy one. My company is located in one state, but we hired employees to do work for us in other states in which they are also residents. How should we handle withholding tax?

1.) Should we withhold state tax based on our location since we don't have a physical location in the other states?

2.)Must we apply for a ID from the states where the employee is doing the work and lives, and withhold that state tax?

Thanks


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 04, 2010 10:10 am 
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Joined: Thu Jun 12, 2003 2:28 pm
Posts: 3448
Location: God-knows-where, PA
No, this is not easy at all.

The definition of "doing business in" is defined by each state. However, generally speaking, if you are doing business in a state, as in generating revenue there, you have nexus and would be a subject employer in that state.

The definition of which employees who work in that state must have withholding is defined by each state.

Plus, states can make reciprocal agreements with nearby states regarding withholding.

I suggest you subscribe to a payroll research publication, such as CCH or BNA so you can read up on each state involved.

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There'll be time enough for countin' when the dealin's done. Being that the dealin' is now done, I'm countin'. And somebody is gonna pay.


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 04, 2010 10:13 am 
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Joined: Tue Jan 27, 2004 3:04 pm
Posts: 8
I didn't think it would be easy. Thanks Patty.


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 04, 2010 12:01 pm 
Board Guru

Joined: Thu Jun 12, 2003 3:14 pm
Posts: 2604
Location: Carrboro, NC
Right - and normally (without reciprocal agreements) the wages are taxable in the state earned and in the state of residence (which usually offers a credit for the taxes paid the other state on the same income). And, having an employee working in a state often indicates nexus (business presence) within that state.

If they are not working in the state where the company is located, and do not live there, they will not owe tax to that state - so no need to withhold there.

Note that SUTA (State unemployment) has a different set of rules. The end result might be the same, but for different reasons.

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Pat, EA in NC
Circular 230 Disclosure: This advice is not intended or written to be used, and it cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 04, 2010 12:36 pm 
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Joined: Mon Aug 04, 2003 7:13 am
Posts: 5181
Location: Oakland, CA
If employees live and work in the same state, game over. That is THE state for all purposes.

If employee live and work in different states, or works in many states, life is complicated, more so in some states then others. This is mostly a SIT issue.

If the employee works in a single state, then 99.99% that is the state for SUTA. The one real exception is NY, who feels that all employers in all states should be paying NY taxes. NY understands that other states very strongly disagree with this position, but it comes up from time to time under several NY rules, one SIT specific and the other SUTA specific.

And if you are in a state for payroll purposes, then you probably are in the state for other tax purposes. Not fun.

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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 11, 2010 1:54 pm 
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Joined: Mon Oct 18, 2004 6:52 am
Posts: 33
Can an employee choose themselves which state to file in; worked state or lived in state if they work in multiple states? If not, what is the best way to accomodate tax forms for them? Can a Generic state tax form be adopted for all states?

Thanks


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 11, 2010 2:17 pm 
Board Guru

Joined: Thu Jun 12, 2003 3:14 pm
Posts: 2604
Location: Carrboro, NC
Employee pays taxes where taxes are required - generally, the state in which the employee works will want income tax - if the employee works in more than one state, each state the employee works in may require tax on the portion of income earned within the state. In addition, the state the employee lives in generally includes all income in the tax return, but may grant a credit for taxes paid to another state on the income earned in that other state.

There are exceptions - if the state has no income tax or does not tax wages, then that state will not require a tax return. Also if the employee works in one state (say Ohio) and lives in another (say Michigan) and the two states have a reciprocal agreement (as MI and OH do) then the employee will only file in the lived in state (in this case MI) so long as the proper paperwork was filed with the employer so the employer did not withhold OH tax. But an employee living in NC and working in MI (NC and MI do not have a reciprocal agreement with each other) will pay roughly 4% income tax to MI (and have to file a MI return) and will show about 8% NC tax on the same income, but will receive a tax credit from NC for the 4% paid to MI (and have to file a NC return and attach a copy of the MI return to the NC return to get the credit). If the MI employer does not have nexus (business presence) in NC, then the MI employer is not obligated to withhold NC tax, but must withhold MI tax. So it is likely the employee will have to make estimated tax payments to NC.

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Pat, EA in NC
Circular 230 Disclosure: This advice is not intended or written to be used, and it cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 11, 2010 3:41 pm 
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Joined: Mon Aug 04, 2003 7:13 am
Posts: 5181
Location: Oakland, CA
Agreed. The employee does not get to "choose" anything. Otherwise, all employees, as in every single employee in the U.S. without exception, would just say that they live in FL and are immune from their own state's taxes. Most states not being complete and total idiots do not have an "opt out" provision on taxes due. I have had employees who work and physically live in CA argue that if they put FL on their W-4, that all CA taxes magically goes away. Point of fact, even if they actually lived in FL and took their LearJet to work every day, CA tax law does not care less where the employee lives.

There is no good one-size-fits-all answer here. There used to be a website with a great chart, but that website has gone to cyber heaven. If we are talking SIT, you basically need to look up the rules for EVERY state the employee works in, plus the state the employee lives in, and try to figure out who wants what. And the states do not always play nice with each other. Sometimes more then one state has their hands out for exactly the same wages.

If you are in a bunch of states, one of the paid payroll library services (APA, BNA, CCH, RIA) works great.

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"Reality is that which, when you stop believing in it, doesn't go away".
Philip K. Dick (1928-1982)


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 11, 2010 5:16 pm 
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Joined: Fri May 30, 2003 1:12 pm
Posts: 239
Location: Orange County, Ca
Hi David,

Was that chart from "Precisepay.com"...i knew i printed out that chart...and finally found it rummaging thru some very old papers..

Mike

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Toby: "Ginger, get the popcorn"


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 11, 2010 7:13 pm 
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Joined: Mon Aug 04, 2003 7:13 am
Posts: 5181
Location: Oakland, CA
Yes. The (possible) problem is that over time the laws change, but that chart does not.

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"Reality is that which, when you stop believing in it, doesn't go away".
Philip K. Dick (1928-1982)


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 Post subject: Re: Withholding for out of state employees
PostPosted: Thu Nov 11, 2010 11:51 pm 
Board Guru

Joined: Thu Jun 12, 2003 3:14 pm
Posts: 2604
Location: Carrboro, NC
Here are a couple of good sites - the sites give some basic info and can get you started, but to get complete and up to date information, it is really best to go to the state website or contact the state.

http://www.payroll-taxes.com/PayrollTaxes/00000103.htm
This is provided by the sponsors of this board

http://www.taxadmin.org/
This is the Federation of Tax Administrators

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Pat, EA in NC
Circular 230 Disclosure: This advice is not intended or written to be used, and it cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.


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