multi-state taxation and reportingpayroll update:! multi-state taxation and reporting presented by...

Payroll Update:!Multi-State Taxation and Reporting

Presented by Larry Holmes

State taxation and reporting requirementsas they apply to state

income tax withholding

We will talk about:1. Tax myths!2. Multi-state withholding

responsibilities!3. Reciprocity!4. Location!5. Nexus!6. Filing tax returns in

multiple states!7. Telecommuting

»FalseEmployees believe they only have to pay income taxes in the state where

they live.

MYTHS

»FalseEmployees assume the state tax rules are the

same as federal tax rules.

MYTHS

»FalseEmployees have to pay taxes to the state where their employer is located.

MYTHS

»FalseEmployees, and some employers, think employees don’t have to file a return in

a reciprocal state.

MYTHS

»FalseEmployees think if they live or work in a state that does not

have an income tax, then they don’t owe state income taxes.

MYTHS

Multi-State Withholding Responsibilities

1. In what state is your organization located?

2. In what state or states do your employees live?

3. In what state or states do your employees work?

4. Does a reciprocal agreement exist?

5. Does a business nexus in those states exist?Q

uest

ions

:

Withhold tax for the state in which services are performed.The default rule:

States That Do Not Have Income Tax Withholding1. Alaska!2. Florida!3. Nevada!

4. New Hampshire!

5. South Dakota!6. Tennessee!

7. Texas!8.Washington!9.Wyoming

The first determination that must be made is where the employee lives.

Withholding Rule No. 1

21

Alabama

Arizona

California

Illinois

New Jersey

ReciprocityWithholding Rule No. 2

Resident and nonresident taxation

Withholding Rule No. 3

Reciprocal Agreement

A reciprocal agreement allows you to withhold only for the state where the employee is a resident.

Illinois » Iowa!» Kentucky!

»Michigan!»Wisconsin

Indiana» Kentucky!» Michigan!» Ohio!

» Pennsylvania!» Wisconsin

Iowa » Illinois

Kentucky» Illinois!» Indiana!» Michigan!» Ohio!

» Virginia!» West Virginia!» Wisconsin

Maryland» District of

Columbia!» Pennsylvania!

» Virginia!» West Virginia

Michigan» Illinois!» Indiana!» Kentucky!

» Minnesota!» Ohio!» Wisconsin

Minnesota » Michigan! » North Dakota

Montana » North Dakota

New Jersey » Pennsylvania

North Dakota » Minnesota! » Montana

Ohio » Indiana!» Kentucky!» Michigan!

» Pennsylvania!» West Virginia

Pennsylvania» Indiana!» Maryland!» New Jersey!

» Ohio!» Virginia!» West Virginia

Virginia» District of

Columbia!» Kentucky!

» Maryland!» Pennsylvania!» West Virginia

West Virginia» Kentucky!» Maryland!» Ohio!

» Pennsylvania!» Virginia

Wisconsin » Illinois!» Indiana!

» Kentucky!»Michigan

District of Columbia » Everybody

Resident and nonresident taxation

Withholding Rule No. 3

An employee is a resident of 1 state

but performs services in another state,

and there is not a reciprocal agreement.

Determine the state of residency.

Withholding Rule No. 1

»Arizona!»California!»Georgia!

»New Mexico!»Oklahoma!»Utah

Exceptions:

The employer is always subject to the laws of any state in which it has an employee performing services.

The amount of wages earned in each state must be separately considered under withholding rule No. 3.

NEXUSConnection

If the employer does not have nexus with an employee’s state of residence, but there is a reciprocal agreement, the employer must honor the reciprocal agreement.

If the employer does not have nexus in a state for which one of its employees has a personal income tax liability, it can choose to establish a withholding account in that state.

Calculate and withhold Arizona income tax.

Calculate California income tax on the same wages.

If the California tax is greater, the employer withholds an amount equal to the differences

between the California income tax and Arizona income tax.

If the California tax is less than the Arizona tax, no California tax needs to be withheld.

TelecommutingEmployers should withhold income tax for the state in which an employee performs service.

The “convenience of the employer” rule

Double Taxation

1. Telecommuting days are normal work days.

Convenience of the Employer

2. The telecommuter’s office is a bona fide office.

The telecommuter must prove that:

A normal workday» Any day that the taxpayer performed the

usual duties of his or her job!» Responding to occasional calls or

emails, reading professional journals, or being available if needed does not constitute performing the usual duties.

Bona fide employer office» The office must meet either the primary

factor, or!» At least 4 of the secondary factors and 3

of the other factors.

The home office contains or is near specialized facilities.

The Multi-State Worker Tax Fairness Act

A state won’t be able to impose income taxes on compensation earned by nonresidents when they are physically outside of the state.

States won’t be able to say that time working at home is not normal work time unless the employer says it’s not normal work time.

Tax Management Multistate Tax Report

Learn the law in the telecommuter’s home state.

Learn how the tax department will treat the arrangement.

Telecommuting laws are likely to change significantly.

»Colorado!»Georgia!»MinnesotaMulti-State Tax Filing

If their state has an income tax, that is the state where they must file their tax return.

Know that every combination of states presents different situations.

They should do their nonresident state and/or part-year resident return first.

Then they should do their resident or home state tax return.

.compayroll-taxeswww./state-tax

Welcome to:!Payroll Update:!

Multi-State Taxation and Reporting!Q&A

With Larry Holmes

Thank you for joining us today!