If an employer has operations in more than one state, income tax might need to be withheld for more than one state. Sometimes the employer might even have to withhold income tax for more than one state from the wages of one employee. Withholding can get complicated when an employee lives in one state and works in another or performs services in more than one state.
Deciding which state's income tax to withhold from an employee's wages can be a confusing process. The default rule of state income tax withholding that can be used as a starting point is to withhold income tax for the state in which services are performed if the employee lives and works in one state (assuming it is not one of the nine states that do not have a state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming).
A resident is subject to the laws of the state of residence, including its income tax laws, so the first determination an employer must make is an employee's state of residency. States have varying definitions of residency.
Once residency is determined, if the employee performs services in a state other than the state of residence, the employer must determine whether the two states have a reciprocal agreement for tax purposes. Reciprocal agreements make things administratively easier for the employer by allowing it to withhold only for the state of residence.
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. Almost all states require employers to withhold tax from employee wages earned for work performed in that state, even for nonresidents. Some states do not require an employer to withhold if an employee has not met a certain threshold for number of days worked in the state or amount of wages earned for services performed in the state, but states have inconsistent, differing requirements.
When an employee travels for business and performs work in a state other than the employee's usual work state, withholding requirements become even more complicated. Employees who work in multiple states are potentially subject to state income tax in every state to which they have traveled for business, even if they performed services in that state during only one day.
The APA is part of the Mobile Workforce Coalition, a group that is pushing for passage of the Mobile Workforce State Income Tax Simplification Act of 2019 (S. 604), a bill with bipartisan support in the Senate. This bill would establish a uniform 30-day threshold a nonresident employee must meet before a state could impose tax on the employee's wages. The legislation has been introduced a number of times since 2006. As part of APA's support, it has submitted statements and urged lawmakers to vote for its passage.
The legislation provides uniform, fair, and manageable requirements that would: (1) end the inconsistent taxation of employees who work in multiple states; (2) reduce the administrative burden on employers caused by temporary out-of-state work assignments; (3) ensure the fair tax treatment of employees performing out-of-state work assignments; and (4) promote increased compliance through a decreased burden.
Consistent with current law, the legislation provides that an employee's earnings are subject to state income tax in his or her state of residence. In addition, under the legislation an employee's earnings would be subject to tax in the state(s) within which the employee is present and performing employment duties for more than 30 days during the calendar year.
As under current law, nonresident employees who travel for business and remain in a state for longer than 30 days (and are therefore subject to that state's nonresident filing and withholding rules) would still be able to take a credit against their resident state personal income tax liability for amounts paid to other states. This would not apply if the employee is a resident of a state without an income tax.
Several APA courses and publications cover more nuanced details about multi-state taxation and withholding requirements.
- APA Government Relations Mobile Workforce State Income Taxes
- Illinois Introduces Nonresident Taxation Legislation: Illinois is unique among states that have an income tax because its personal income tax does not apply to nonresidents who work for a business based in another state. That would change under H.B. 3633.
- Inside Washington, May 2019, "U.S. Congress and Illinois Introduce Nonresident Taxation Bills": Employees who travel out of state on business are subject to the income tax withholding laws of the states in which they perform work. In 24 states, nonresident employees are subject to withholding on the first day the employee performs work within the state.
- Mobile Workforce Bill Introduced in 2019-2020 Congress: If enacted, S. 604 would simplify multi-state taxation by establishing a 30-day threshold before a state could impose income tax on a nonresident employee's wages.
- Mobile Workforce Coalition
- Mobile Workforce State Income Tax Simplification Act
- APA's Guide to State Payroll Laws, 2019 ed.
- Payroll Issues for Multi-State Employers
- PayState Update
- PayState Update, Issue 10, Vol. 21, "Illinois Introduces Nonresident Taxation Legislation": Since the federal government has not yet been successful in passing legislation that would make it easier for employers and employees to comply with and pay nonresident state income taxes, states are now trying to fill the void.
- PayState Update, Issue 8, Vol. 21, "Mobile Workforce Bill Introduced in 116th Congress": If enacted, the law would establish a 30-day threshold before a state could impose income tax on a nonresident employee's wages.