The following information was provided in a seminar conducted by the
American Payroll Association.
From a basic rule of
thumb to three rules
Withholding rule number 3: Resident/non-resident
taxation policies
Withholding on residents working out of the
state and non-residents table
For Which State Must You Withhold?
If your company has operations in more than one state, you may be faced with income tax withholding for more than one state. Sometimes, you may even have to withhold income tax for more than one state from the same employee. Withholding can get even more complicated when you have employees who live in a different state than the one they work in or who perform services in more than one state.
Deciding which state's income tax to withhold can be a confusing process. How do you determine who is a resident and whether you should follow the laws of the state of residence or the laws of the state in which services are performed? Not all states answer these basic questions in the same way and, sometimes, state laws conflict. Even the simple word "operations,'' as used in the paragraph above, is more complex than you might think.
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. It can be
applied in most situations in which tile 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).
However, up
to three other withholding rules may have to be considered when the situation
is not as straightforward. For example, an employee who lives and works in one
state may still be a resident of some other state; that's where withholding
Rule No. 1 comes into play. In this scenario, the employee may have income tax
liability for the state of residency, and, if you have operations in that state
and meet certain other criteria, you may be required to withhold for that other
state. On the next level, if an employee lives in one state and works in
another, each state's laws of reciprocity (withholding Rule No. 2) and
resident/non-resident taxation policies (withholding Rule No. 3) must be
examined.
The very first
determination that must be made is the state of residence of the employee. This
is primary because a resident of a state is subject to the laws of that state,
including its income tax laws. Furthermore, 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.
Employees commonly claim that they are a resident of their "home" state. If the employee has relocated to work for you, he/she may assert that the former state is his/her state of residence because he/she still has a home and family there (and doesn't want to complete personal income tax returns for two states). An employee who works for you only during the nine months of the school year, for example, might try to claim that she is a resident of the state she grew up in but in which she now spends only three months of the year. This may be especially likely if her home state doesn't have an income tax.
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:
1.
Being domiciled in the state, or
2.
Spending more than a certain number of days in the state.
The term "domicile" usually means the place where an individual has a true, fixed, permanent home and principal establishment, and it usually means the place to which the individual intends to return. Common indicators that an individual is domiciled in a particular location include:
ˇ
Property ownership
ˇ
Bank accounts
ˇ
Driver's license and vehicle registration
ˇ
Voting registration
ˇ
Presence of family
ˇ
Club and church memberships
For example, New York claims as a
resident anyone who is either of the following:
ˇ
Domiciled in the state, or
ˇ
Maintains a permanent place of abode and spends more than
183 days of the year in the state
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STATE DEFINITIONS OF A RESIDENT
FOR INCOME TAX WITHHOLDING |
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Alabama |
A person having a permanent
place of abode or who is domiciled in the state and spends more |
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Alaska |
Not applicable |
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Arizona |
A person domiciled or who spends
more than nine months a year in the state |
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Arkansas |
A person domiciled in the state
or who maintains a residence and spends six months a year in |
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California |
Withholding required for
residents and nonresidents |
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Colorado |
A person maintaining a permanent
place of abode or domiciled in the state and spends more |
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Connecticut |
An individual who is domiciled
or has a permanent place of abode in the state and spends |
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Delaware |
A person who is domiciled,
maintains a permanent place of abode, and spends more than 183 |
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District of Columbia |
A person domiciled or residing
or has a place of residence in the state tbr more than seven |
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Florida |
Not applicable |
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Georgia |
A person moving in or out of the
state is taxed only on income received in the state |
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Hawaii |
Any individual domiciled or
residing in the state. Reside is to spend more than 200 days a |
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Idaho |
A person who is domiciled, and
maintains a place of abode for thc entire year and resides in the state more
than 270 day a year |
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Illinois |
Any person who is in the state
for other than a temporary or transitory purpose during the year |
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Indiana |
Anyone who resides, maintains a
place of legal residence and spends more than 183 days of the year in the
state |
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Iowa |
A person domiciled in or
maintaining a permanent place of abode in the state |
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Kansas |
A person domiciled in,
maintaining a permanent abode, and spending more than six months a year in
the state |
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Kentucky |
A person who is domiciled,
maintains a permanent place of abode, and spends more than 183 days a year in
the state |
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Louisiana |
Anyone domiciled, maintaining a
permanent place of abode, or who spends more than six months of the year in
thc state |
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Maine |
A person who is domiciled, maintains
a permanent place of abode, and spends more than 183 days a year in thc state |
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Maryland |
Anyone domiciled in the state on
the last day of tile year or who maintains a place of abode within the state |
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Massachusetts |
A person who is domiciled,
maintains a permanent place of abode, and spends more than 183 days a year in
the state |
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Michigan |
An individual who lives in the
state at least 183 days in the year |
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Minnesota |
An individual domiciled in the
state or outside of the state who maintains a place of abode and spend more
than one half of the year in the state |
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Mississippi |
A person domiciled in the state |
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Missouri |
A person domiciled or who spends
more than 183 days of the year in the state |
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Montana |
An individual who has a domicile
or who maintains a permanent place of abode within the state and has not
established residence elsewhere |
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Nebraska |
A person who is domiciled,
maintains a permanent home and spends more than six months of the year in the
state |
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Nevada |
Not applicable |
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New Hampshire |
Not applicable |
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New Jersey |
Any person domiciled in the
state for the full year or is not domiciled in the state but maintains a
permanent home and spends more than 183 days of the year in the state |
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New Mexico |
A person domiciled in the state |
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New York |
A person domiciled or who
maintains a permanent place of abode and spends more than 183 days of the
year in the state |
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North Carolina |
Withholding required for
residents and nonresidents |
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North Dakota |
An individual domiciled, or who maintains
a permanent place of abode within the state and spends more than seven months
of the year in the state |
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Ohio |
A person domiciled in, living
in, or who maintains a permanent place of abode in the state and doesn't spend
more than 335 days outside of the state |
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Oklahoma |
A person who maintains a
permanent place of abode, or is domiciled in the state and spends more than
seven months of the year in the state |
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Oregon |
A person domiciled or who maintains
a permanent place of abode and spends more than 200 days of the year in the
state |
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Pennsylvania |
A person who is domiciled in the
state(unless a permanent place of abode is maintained else where and no more than
30 days are spend in the state) annually or is not domiciled in the state but
maintains a permanent place of abode in the state and spends more than 183
days a year in the state |
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Rhode Island |
A person domiciled or who
maintains a permanent place of abode and spends more than 183 days of the
year in the state |
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South Carolina |
A person domiciled in the state |
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South Dakota |
Not applicable |
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Tennessee |
Not applicable |
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Texas |
Not applicable |
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Utah |
A person domiciled or who
maintains a permanent place of abode and spends more than 183 days of the
year in the state |
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Vermont |
A person domiciled or who
maintains a permanent place of abode and spends more than 184 days of the
year in the state |
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Virginia |
A person domiciled or who
maintains a permanent place of abode and spends more than 183 days of the
year in the state |
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Washington |
Not applicable |
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West Virginia |
A person domiciled or who maintains
a permanent place of abode and spends more than 183 days of the year in the
state |
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Wisconsin |
A person who is domiciled in the
state |
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Not applicable |
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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. (This is an example of why the rule
of thumb is only a starting point.) Accordingly, you would report wages only to
the state of residence when completing boxes 16-17 (state wages) of federal
Form W-2, Wage and Tax Statement. In most cases, the employee will be required
to submit a certificate of non-residence for the state in which he/she works
before you can honor the reciprocal agreement.
The general
purpose of reciprocity is to make things administratively easier for the
employee and employer. The employee will have to file only one state personal
income tax return, and the employer will withhold only for the state in which
the employee lives. This is especially helpful if you have an employee who
performs services in two or more states that have reciprocity with the state of
residence. For example, for an employee who lives in the District of Columbia,
works in D.C., Virginia, and Maryland, and submits certificates of
non-residence for Virginia and Maryland, the employer will need to withhold
only D.C. income taxes because the three jurisdictions have reciprocal
agreements with each other. Without reciprocity, the employer would have to
withhold for all three jurisdictions based on the time worked in each one.
On the
other hand, the presence of a reciprocal agreement requires you to change the
state of withholding and reporting if the employee moves his/her residence from
one state to another, even though there has been no change in the state in
which the services are performed.
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RECIPROCAL WITHHOLDING
AGREEMENTS BETWEEN STATES |
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Alabama |
None |
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Alaska |
Not applicable |
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Arizona |
None |
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Arkansas |
Residents of Texarkana, Arkansas
are exempt from Arkansas state income tax and withholding. Residents of
Texarkana, Texas are exempt from Arkansas income tax for wages earned in Texarkana,
Arkansas. Agreement does not apply to residents of other cities or other
Texas residents working in other parts of Arkansas. |
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California |
None |
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Colorado |
None |
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Connecticut |
None |
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Delaware |
None |
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District of Columbia |
Reciprocal agreements with
Virginia and Maryland. Non-Residents of District of Columbia filling out a
Certificate of Nonresidence are not subject to DC withholding unless they
voluntarily request the withholding. |
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Florida |
Not applicable |
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Georgia |
None |
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Hawaii |
None |
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Idaho |
None |
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Illinois |
Residents of Iowa, Kentucky,
Michigan or Wisconsin are not subject to Illinois income tax withholding for wages
earned in Illinois if an Employee's Statement of Non-Residence in Illinois is
filed with the employer. The reciprocal agreement with Indiana expired at the
end of 1997. |
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Indiana |
Residents of Kentucky, Michigan,
Ohio, Pennsylvania, and Wisconsin are not required to have Indiana
withholding. The reciprocity is not applicable to county income taxes. The
reciprocal agreement with Illinois expired at the end of 1997. |
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Iowa |
Residents of Illinois have Illinois
state tax withheld only if the Employee's Statement of |
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Kansas |
None |
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Kentucky |
Resident of Illinois, Indiana, Michigan,
Ohio, West Virginia, and Wisconsin have only their resident state tax
withheld if a Certificate of Nonresidence is filed with the employer. Daily
commuters between Kentucky and Virginia are provided reciprocal benefits. |
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Louisiana |
None |
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Maine |
None |
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Maryland |
No Maryland tax is withheld from
employees who commute daily to Maryland and reside in the District of
Columbia, Pennsylvania, Virginia and West Virginia. A certificate of nonresidence
must be filed with the employer. |
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Massachusetts |
None |
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