Multi-state Employee Payroll Tax Considerations

Does your organization have employees who work remotely or have a hybrid work arrangement?

Does your organization have employees who live and work in multiple states?

If you answered YES to any of these questions, you may have multi-state payroll tax issues to consider.

Employers are required to determine their state withholding, depositing, and reporting obligations for multi-state workers in the following scenarios:

• Employee lives in State A and works in State B
• Employee lives in State A and works in State A and State B
• Employee lives in State A and works in State B and State C
• Employee lived and worked in State A. They now live and work in State B, and periodically travel for work to State A

Recent technological advances and the COVID-19 pandemic have resulted in a significant increase in the number of remote workers employed by businesses nationwide. Employers that may not have previously considered the employment tax implications of having workers in multiple jurisdictions are now being required to evaluate the impacts to their payroll. Further, employers that have historically had workers in multiple jurisdictions may now have employees performing services in new locations. Due to the complex compliance requirements relating to multi-state workers, it is essential that employers review their state income tax (SIT) withholding and unemployment insurance (SUI) treatment for these employees. Any required adjustments to withholding, depositing, and reporting procedures should be made in a timely manner.

Employers are generally required to withhold SIT from wages in states where employees perform services. If an employer has not previously had employees within a particular state, in most cases the employer should register with the state’s Department of Revenue (DOR) to obtain a SIT withholding account number. The employer will ordinarily be required to withhold SIT from wages earned within the state, remit amounts withheld to the DOR, and file periodic SIT withholding returns.

Every state – and every combination of states – has its own rules governing SIT withholding requirements. In addition to its general withholding criteria, a particular state may have a de minimis threshold, reciprocal agreements, and convenience of the employer rule. Local income tax (LIT) and other regional employment taxes may also apply, depending on location. Each of these factors must be evaluated for an employer to properly determine where a withholding obligation exists.

The determination of jurisdiction for purposes of SUI is based on different criteria than SIT. An employee’s wages are ordinarily subject to SUI only in that state where their services are localized. Localization occurs when the majority of an employee’s services are performed within one state, and services performed within other states are incidental to services performed within the primary state. If localization cannot be determined, then additional tests apply to establish where an employee’s wages are subject to SUI.

We Can Help

For more information on payroll tax implications for multi-state workers, contact our team to see how we can assist you.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.