Human ResourcesState Income Taxes for Out of State Employees

Income taxes in every state are different. There are states with high taxes, others have low taxes, while some don’t really have these taxes at all.

These state income taxes become more complicated id you have employees living and working in different states, working from home in a state far from your business, or travelling for work. This can make it confusing to determine where you will make the payment as well as the amount of tax to withhold.

Basics of Payroll Taxes for Your Out of State Workers

In general, you should withhold state taxes for the specific state where your employer is performing work. You have to register with every state tax department where the withholding will be remitted. This might sound simple but this is only the basic rule. You have to follow a few other nuanced rules.

Employee Works and Lives in Two Different States

If you have an employee living in one state which works in another, you have to withhold the state taxes for the specific state wherein the employee is working.

Temporary Placement

Chances are you are also sending your employee to various locations. They could stay at that location for a short or long period of time. Just like in the first rule, you will also be withholding and remitting the state taxes for the particular state wherein the employee is working.

For example, you send your employee on short term stays to various states. That employee lives then mainly works in a single state yet meets with clients then attends conferences in some other states. Depending on the specific states and the length of time your employee lives there, you will have to withhold the taxes for the certain state where your employee works even if they only stay there for just one day. You have to check the rules of the state for specific details about the length of time the employee should temporarily work there before you can start collecting taxes for that work state.

States With No Withholding Taxes

There are seven states with no income taxes, namely Wyoming, Washington, Texas, South Dakota, Nevada, Florida, and Alaska. The other two states, Tennessee and New Hampshire just have interest income and income taxes on the dividend.

Reciprocal States

There are states that have tax reciprocity. The reciprocal agreement lets you withhold taxes for state residence instead of the work state for the out of state workers. Not every state has a reciprocal agreement. There are states which only have state tax reciprocity agreements and with just certain states.

In general, when an employee is living in one state then works in a different state, you have to withhold taxes for the specific state they are working in. However, when their work and home states have reciprocal agreement, the working is going to give you reciprocal withholding certificate which will request you for withholding taxes for the home state. You will not be required to act on reciprocal agreement unless this certificate is given to you by your employee.