Multi-State Payroll. State Income Tax Withholding

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1 Multi-State Payroll Part 2 Tax Challenges Charlotte N. Hodges, CPP October 7, 2016 State Taxation Considerations Unemployment Insurance Taxes Temporary Disability Insurance 1

2 States With No Income Tax Alaska Florida Nevada New Hampshire South Dakota Tennessee Texas Washington Wyoming Nexus: Business Connection Nexus is established by having a business presence in a state An office, store, or factory will create nexus, as will the mere entry of an employee into a state to make a sale or perform a service call In the withholding context, the employer s concern is whether it has a business connection, or any operations, within a state If it does, it is subject to the withholding laws of that state This will make the difference in whether an employer has to withhold income tax for an employee s state of residence even though he or she performs no services there. 2

3 Employee Works and Lives in the Same State The default rule of state income tax withholding is to withhold income tax for the state in which services are performed It can be applied in most situations where the employee lives and works in the same state (assuming it is not one of the nine states without income tax withholding: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) Employee Works and Lives in Different States If an employer does not have nexus with an employee s state of residence, but there is a reciprocal agreement between the two states The employer must honor the reciprocal agreement and not withhold income tax for the state where the employee works In this situation the employer is not obligated to withhold income tax for the state where the employee lives because the employer does not have nexus with the resident state 3

4 Employee Works and Lives in Different States If an employer does not have nexus with an employee s state of residence, but there is a reciprocal agreement between the two states The employer must honor the reciprocal agreement and not withhold income tax for the state where the employee works In this situation the employer is not obligated to withhold income tax for the state where the employee lives because the employer does not have nexus with the resident state Employee Works and Lives in Different States If an employer does not have nexus in a state where an employee has income tax liability, it can choose to establish a withholding account in that state and begin withholding as a courtesy to employee However, the payroll department should check with the corporate tax and legal departments because once you voluntarily register for one tax, you may receive inquires from the state about other taxes for which you are not liable, such as sales or corporate income tax Also, in some states, withholding and paying over taxes can make your company subject to legal process in that state 4

5 Withholding Rule #1: Resident Defined Three other withholding rules may have to be considered when using the default rule is not clearly indicated The first determination is the state of residence of the employee - this is because a resident of a state is subject to the laws of that state, including its income tax laws States have varying policies on withholding from residents who perform services in another state and from nonresidents who perform services within the state To locate and apply the policies correctly, you ll need to know which state(s) can claim the employee as a resident Withholding Rule #1: Resident Defined Employees commonly claim that they are a resident of their home state If the employee has relocated to work for you, s/he may assert the former state is the state of residence because a home or family exists there - It s up to you to locate and follow the rules of the appropriate state Most states have a two-pronged definition of residency, outlining that someone will be a resident by either - being domiciled in the state, or spending more than a certain number of days in the state 5

6 Withholding Rule #1: Resident Defined Domicile means the place where the employee has a true, fixed permanent home and principal establishment the place where he or she intends to return Withholding Rule #1: Resident Defined Common indicators that an individual is domiciled in a particular state are: Owning Property Bank Accounts Driver s License Club Memberships Family Presence Voter s Registration Vehicle Registration Church Memberhip 6

7 Withholding Rule #2: Reciprocity If an employee performs services in a state other than the state of residence, you must find out whether the two states have a reciprocal agreement A reciprocal agreement allows you to withhold only for the state of residence, as opposed to the state in which services are performed Withholding Rule #2: Reciprocity The general purpose of reciprocity is to make things administratively easier for the employee and employer The employee will only have to file one state personal income tax return The employer will withhold only for the state in which the employee lives 7

8 Withholding Rule #2: Reciprocity The presence of a reciprocal agreement requires the employer to change the state of withholding and reporting if the employee moves their residence from one state to another, even though there has been no change in the state in which the services are performed Withholding Rule #3: Resident/ Nonresident Taxation Policies If an employee is a resident of one state but performs services in another, and there is no reciprocal agreement, the employer must consider the laws of both states The correct determination of the state of residence (Rule No. 1) is very important in these situations because it tells the employer which state s laws that may need to be considered in addition to those of the state in which the employee works 8

9 Withholding Rule #3: Resident/ Nonresident Taxation Policies The state in which the services are performed will almost always require withholding from nonresidents who come into the state to work (withholding only from the wages for services performed in that state) A few states have exceptions to this, usually based on a time worked or money earned threshold In general, an employer is always subject to the laws of any state in which it has an employee performing services, whether or not the employer has a facility in the state Withholding Rule #3: Resident/ Nonresident Taxation Policies The employee s state of residence may also need to be considered even if the employee doesn t work there If the employer has a business connection (nexus) with the state where the employee resides, the employer is subject to the laws of that state, and may be required to withhold that state s income tax in addition to the tax for the state in which the employee is working 9

10 Military Spouses Residency Relief Act Under the Military Spouses Residency Relief Act signed into law on November 11, 2009, military spouses who earn income in the state where their spouse is stationed may be able to claim either the state they are located in or their spouse's legal residence (if they have established residence there as well) for tax purposes This could generate big savings if their spouse's legal residence has lower tax rates - or no income tax at all The military spouse remains liable for income tax in the home state and may have to pay estimated taxes Employee Travels Employees working in more than one state may be subject to allocation rules that divide up the withholding obligations or requirements among the states in which the work is performed The withholding rules for the home state continue to be taken into consideration 10

11 Example of Payroll Intranet Information Page U.S. Requirements State income tax withholding is required in states with an income tax. State income taxes will be withheld for the state in which the services are performed for associates who live and work in one state. Each state s laws of reciprocity and resident/nonresident taxation policies must be considered for employees living in one state and working in another state. Please review the chart below and complete a state tax form where required. In the absence of a state income tax withholding form, state income tax withholding will be set-up based on guidance provided by the state. This is generally the highest withholding rate. Example of Payroll Intranet Information Page U.S. States with Reciprocal Agreements and Forms The U.S. states listed below have reciprocal agreements for state income tax withholding purposes. A reciprocal agreement is an agreement between two states in which the states agree not to tax the wages of the other state's residents. The table below summarizes the reciprocal agreements that currently exist. If a reciprocal agreement applies, you must complete the form identified below to qualify for exemption from non-resident state income tax withholding under the state agreements. 11

12 Arizona An employer must withhold Arizona tax from wages paid to a nonresident for services performed within Arizona There are exceptions to the general mandatory withholding requirements for nonresident employees temporarily performing services for their employer in Arizona Although a nonresident employee may be exempt from Arizona income tax withholding, the employee may be required to file a nonresident Arizona income tax return if the employee meets the filing requirement Arizona An employer may not have to withhold Arizona tax from wages paid to a nonresident performing services in Arizona if: The employee is physically present in Arizona for less than 60 days in a calendar year for the purpose of performing a service that will benefit the employer; AND The employer is an individual, fiduciary, partnership, corporation or limited liability company having property, payroll and sales in Arizona, or of a related entity having more than 50% direct or indirect common ownership An explanation of this exemption (including examples) is included in the Employer s Instructions for the Arizona Form A-4 12

13 Arizona If a resident of this state is employed outside the state, the person may request the employer to withhold taxes on wages earned for the services performed outside the state If withholding in both states occurs, income tax returns filed in the other state may be attached to the Arizona return and used for credit against the remaining Arizona tax liability Arizona - Reciprocity The states of California, Indiana, Oregon, and Virginia and the District of Columbia allow Arizona residents a deduction for the taxes paid to Arizona when filing the yearly income tax return for those states Residents of these states can request exemption from Arizona withholding by filing form WEC, Withholding Exemption Certificate 13

14 California Employers within the state must withhold income tax from wages of nonresidents for services performed in the state If a nonresident performs services inside and outside of the state of California, only wages earned within California are subject to California withholding The amount of wages attributable to services performed in California is that portion of the total compensation which the total number of working days within the state bears to the total number of working days inside and outside of the state California Resident employees are subject to California withholding for wages earned outside of the state When California residents are liable for withholding for both California and another state or jurisdiction, employers should first withhold amounts required by the other jurisdiction and withhold for California only the amount, if any, by which the applicable California withholding exceeds that for the other state 14

15 California - Reciprocity California has no specific reciprocal agreements, but residents of Arizona, Guam, Indiana, Oregon, and Virginia are allowed a credit toward their California income tax liability for taxes paid to their home state New York Employers must withhold New York state income tax from all payments of taxable wages to residents, regardless of where their services were performed If a New York resident is employed entirely outside of New York and wages earned are subject to the withholding tax of another state, that employer is not required to withhold New York taxes unless the withholding amount for the other state's tax is less than the withholding amount for New York Double withholding may be avoided by reducing the amount of New York state tax required to be withheld by the amount of income tax required to be withheld for the other taxing jurisdiction 15

16 New York Employers must withhold New York income tax from the wages earned by nonresidents for services performed within New York. For nonresidents performing services inside and outside of the state of New York, only wages earned within the state are subject to New York income tax withholding Nonresidents may be excluded from New York income tax withholding if the income earned in New York by that employee will not exceed the amount of personal exemptions the employee is allowed to take New York Withholding of all wages paid to nonresidents working inside and outside of the state is required if the employee fails to file Form IT , or if the employer does not have adequate records to determine accurately the correct amount of wages attributable to work in New York 16

17 New York Employers would not be penalized by the state for failing to withhold state taxes on wages paid to nonresident employees performing services in New York if the employee does not work more than 14 days in the state, the employee is assigned to a primary work location outside the state, the employer reasonably expects that the employee will work in the state for up to 14 days a year, and the employee's compensation is not a form of excepted compensation as listed in TSB-M-12(5)I New York Convenience of the employer test The instructions for Form IT-203-B, relating to Schedule A, Allocation of Wage and Salary Income to New York State, provide that: Work days are days on which you were required to perform the usual duties of your job. Any allowance for days worked outside New York State must be based upon the performance of services which, because of necessity (not convenience) of the employer, obligate the employee to out-of-state duties in the service of his employer. Such duties are those which, by their very nature, cannot be performed at the employer s place of business. 17

18 New York Convenience of the employer test Applying the above principles to the allocation formula, normal work days spent at home are considered days worked in New York State, and days spent working at home that are not normal work days are considered to be nonworking days. Note: Under this rule, days worked at home are considered New York work days only if the employee s assigned or primary work location is at an established office or other bona fide place of business of the employer (hereinafter, a bona fide employer office) in New York State. If the employee s assigned or primary work location is at an established office or other bona fide place of business of the employer outside New York State, then any normal work day worked at home would be treated as a day worked outside New York State. New York - Reciprocity New York has no reciprocal agreements 18

19 District of Columbia Per DC Office of Tax and Revenue: You must withhold DC taxes from any employee or payee on your pay or distribution rolls if he/she resides or is domiciled in DC when the tax is required to be withheld (that is, at the end of the pay period) District residents are not subject to District withholding if employed outside the jurisdiction. District of Columbia There is no provision requiring District income tax to be withheld from the wages of nonresidents working in the District. The employer must ascertain the residency of the employee. Nonresidents should file Form D-4A, Certificate of Nonresidence in the District of Columbia, with their employers 19

20 District of Columbia - Reciprocity The District of Columbia has informal reciprocal agreements with Virginia and Maryland Residents of the District working in those states are not subject to District withholding unless they voluntarily request that District tax be withheld Maryland Per Maryland Employer Withholding Guide For employees who are residents of Maryland and are working and paying withholding taxes in Delaware or any other nonreciprocal state, use the Delaware/Nonreciprocal state rate, which includes local tax and credit for taxes paid to another state or locality 20

21 Maryland Per Maryland Employer Withholding Guide Nonresidents from states that have no income tax law or have no written reciprocal income tax agreement with Maryland are subject to Maryland tax and withholding must be made from salaries and wages for services performed in Maryland Maryland - Reciprocity A nonresident is not subject to tax if: His/her income consists entirely of wages or other compensation for personal services performed in Maryland; and The state of residence has agreed in writing to allow a reciprocal exemption from tax and withholding for each other s residents 21

22 Maryland - Reciprocity Maryland tax is not withheld by employers of employees who commute daily to perform services within the state of Maryland and who reside in the District of Columbia, Pennsylvania, Virginia, and West Virginia Under such circumstances, it is necessary that Maryland Form MW507, Employee Maryland Withholding Exemption Certificate, be filed with the employer in which the employee certifies that s/he resides within one of the reciprocal states listed on the form Nonresidents who do not commute daily are only eligible for a partial exemption from Maryland income tax withholding Virginia Per Virginia Employer Withholding Guide An employee (resident and nonresident) is generally subject to Virginia income tax withholding if the individual receives taxable wages for services performed in Virginia and is not eligible for an exemption from withholding Nonresident employees are subject to withholding for services performed within Virginia, except those covered by a reciprocal agreement Virginia residents subject to tax in another state will receive credits for those taxes against the amount owed to Virginia 22

23 Virginia - Reciprocity Current reciprocity agreements affect Virginia withholding requirements for residents of the following states: Kentucky, the District of Columbia, Maryland, West Virginia and Pennsylvania. Kentucky and the District of Columbia: Wage and salary payments to residents of these states are not subject to Virginia withholding if the employees commute daily to a place of employment in Virginia Virginia - Reciprocity Maryland, West Virginia, and Pennsylvania: Wage and salary payments made to residents of these states are not subject to Virginia withholding if the employees meet the following conditions: The employee maintains a legal domicile in another state and lives in Virginia for less than 183 days of the taxable year (or does not live in Virginia at all) The only Virginia source income received during the year was from salaries or wages The Virginia source income is subject to taxation by the individual s state of residence 23

24 Virginia - Reciprocity Any nonresident who is exempt from Virginia withholding under a reciprocity agreement must indicate this on the Form VA-4, Employee s Exemption Certificate, filed with his or her employer. State Taxation Considerations Compensation takes many forms, some types are subject to payroll taxes and some are not Advances and loans, gifts, awards, and prizes, employee fringe benefits, business expense reimbursements, vacation and other time-off pay are among the types of compensation that will need to be analyzed in order to fulfill withholding and payment obligations as an employer In addition, special rules apply to noncash wages 24

25 State Taxation Considerations The federal income tax rules governing cafeteria plans are set out in Section 125 of the Internal Revenue Code. Under Section 125, an employee is not subject to federal income taxes when electing qualified nontaxable benefits offered through a cafeteria plan, even though the employee could have elected to receive cash in lieu of the qualified benefits. New Jersey and Puerto Rico do not follow Section 125 and tax employees on cafeteria plan benefits under the doctrine of constructive receipt In New Jersey, the value of an employee's option to receive cash is not taxable, as long as the employee does not elect to receive cash - Employee deferrals, however, will still not decrease taxable wages State Taxation Considerations In Pennsylvania, health, eye, dental care, group term-life insurance, and the personal use of employer property, i.e. a company car, are excludable from taxation Pennsylvania differs from federal provisions with respect to elective employee contributions under a salary reduction agreement or cash or deferred arrangement to a Section 401(k) plan, a Section 408(k) Simplified Employee Pension plan, a 457 plan or a trust established by the employer to fund federally nonqualified deferred compensation payments These amounts are taxable for state purposes 25

26 Unemployment Insurance Taxes Federal Unemployment Tax Act (FUTA) Employers are levied taxes as a percentage of wages up to a maximum taxable wage base For purposes of FUTA taxes, qualified cafeteria plan payments, with the exception of deferrals to a Section 401(k) cash-or-deferred arrangement, may be excluded from employees' wages, even though employees otherwise could elect to receive cash in lieu of qualified benefits Deferrals to Section 401(k) plans must be counted as wages whether or not the 401(k) plan is part of a cafeteria plan Unemployment Insurance Taxes Louisiana Employers are taxed on wages paid to employees, up to an annual limit or wage base Effective for 2016 the taxable wage base is $7,700 Wages paid to employees that were subject to unemployment taxes of jurisdictions other than Louisiana cannot be credited for the purpose of determining the amounts of those employees' wages subject to Louisiana's unemployment taxes 26

27 Unemployment Insurance Taxes Minnesota Employers are taxed on wages paid to employees, up to an annual limit or wage base Effective for 2016 the taxable wage base is $31,000 Wages paid to employees that were subject to unemployment taxes of jurisdictions other than Minnesota cannot be credited for the purpose of determining the amounts of those employees' wages subject to Minnesota's unemployment taxes Unemployment Insurance Taxes Montana Employers are taxed on wages paid to employees, up to an annual limit or wage base Effective for 2016 the taxable wage base is $30,500 Employers cannot credit employees' wages taxed under the unemployment laws of other jurisdictions toward Montana's taxable wage base to reduce wages taxable under Montana's unemployment law 27

28 Unemployment Insurance Taxes District of Columbia Employers are taxed on wages paid to employees, up to an annual limit or wage base Effective for 2016 the taxable wage base is $9,000 The wage base includes any wages paid for employment under the unemployment insurance law of another jurisdiction Unemployment Insurance Taxes Maryland Employers are taxed on wages paid to employees, up to an annual limit or wage base Effective for 2016 the taxable wage base is $8,500 The wage base includes any wages paid for covered employment under the unemployment insurance law of another state 28

29 Unemployment Insurance Taxes Virginia Employers are taxed on the wages paid to employees, up to an annual limit or wage base Effective for 2016 the taxable wage base is $8,000 The wage base includes any wages paid for employment under the unemployment insurance law of another state Temporary Disability Insurance California 2016 taxable wage base is $106,742 (annually) 2016 employee tax rate for coverage by the state plan is 0.9 percent (includes funding for paid family leave) Private plans (voluntary plans) may be established if approved by Employment Development Department 29

30 Temporary Disability Insurance Hawaii 2016 taxable wage base is $ (weekly) 2016 tax rate is 0.5 percent of weekly earnings up to the wage base ($4.91) may be deducted from each employee Self-insured plans may be established if approved by the State of Hawaii Disability Compensation Division Temporary Disability Insurance New Jersey 2016 taxable wage base is $32,600 (annually) 2016 employee tax rate is 0.2% (employee also contributes 0.08% for family leave insurance in addition to TDI) 2016 employer contribution rate varies from 0.10% to 0.75% Private plans may be established if approved by the Private Plan Operations, Plan Approval Unit 30

31 Temporary Disability Insurance New York 2016 taxable wage base is $ (weekly) 2016 tax rate is 0.5 percent of weekly earnings up to the wage base ($0.60) may be deducted from each employee Private plans may be established only when the plan is insured through a carrier licensed by New York State to write statutory disability benefits insurance policies, or by an employer authorized by the New York State Workers' Compensation Board to self-insure for disability benefits Temporary Disability Insurance Puerto Rico 2016 taxable wage base is $9,000 (annually) 2016 employee tax rate is 0.3% of annual earnings up to the wage base 2016 employer tax rate is 0.3% of annual earnings up to the wage base Private plans may be established with an authorized insurance company or, if not insured, with state approval and employer-posted bond 31

32 Temporary Disability Insurance Rhode Island 2016 taxable wage base is $66,300 (annually) 2016 employee tax rate is 1.2% of annual earnings up to the wage base State plan only 32

33 GTL 401(k) Dependent Care FSA Sec 125 Benefits (includes medical FSA) Adoption Assistance Transportation Benefits Health Spending Account (HSA) Pennsylvania State Not Taxable Taxable Taxable Not Taxable Taxable Taxable Not Taxable Pennsylvania SUI (EE & ER) Not Taxable Taxable Taxable Taxable Taxable Taxable Not Taxable Philadelphia City Taxable Taxable Taxable Taxable Taxable Taxable Not Taxable GTL 401(k) Dependent Care FSA Sec 125 Benefits (includes medical FSA) Adoption Assistance Transportation Benefits Health Spending Account (HSA) New Jersey State Taxable Not Taxable Taxable Taxable Taxable Taxable Taxable New Jersey SUI/SDI/FLI Not Taxable Taxable Taxable Taxable Taxable Taxable Taxable GTL 401(k) Dependent Care FSA Sec 125 Benefits (includes medical FSA) Adoption Assistance Transportation Benefits Health Spending Account (HSA) California State Taxable Not Taxable Not Taxable Not Taxable Not Taxable Not Taxable Taxable GTL 401(k) Dependent Care FSA Sec 125 Benefits (includes medical FSA) Adoption Assistance Transportation Benefits Health Spending Account (HSA) Winchester, KY OPT Taxable Taxable Taxable Taxable Taxable Taxable Taxable GTL 401(k) Dependent Care FSA Sec 125 Benefits (includes medical FSA) Adoption Assistance Transportation Benefits Health Spending Account (HSA) Cleveland, OH City Tax Taxable Taxable Not Taxable Not Taxable Not Taxable Not Taxable Not Taxable Charlotte N. Hodges, CPP Thank you for listening to me today and for sharing your valuable time with me. 33