When you have employees who live in one state and work in another, things can get a bit tricky. Learn the basic rule — you generally pay taxes in the state where your team works, but it can get complicated.
Do you have employees who live in one state and work in another? You may run into this if:
- Your company is located near a state border.
- You have employees who travel to job sites in other states.
- You have employees who work remotely.
- You are expanding into new states.
Having some basic understanding of what happens will help you make the right decisions about classifying wages and avoiding penalties or amended filings later. Both state unemployment and withholding taxes should generally be paid to the employee’s work state, but there are exceptions; the twist is that state laws are quite literally all over the map. You may want to be familiar with the state legislation that applies to your team. Here are the basics.
Some states that border each other have entered into agreements related to allowing employees who live in one state but work in another, to have their withholding tax paid to the work state.For example, an employee who lives in Pennsylvania but commutes to southern New Jersey, for a job can have withholding tax paid to Pennsylvania rather than the work state. This is also known as courtesy withholding, and it means the employee can file one tax return each year, which helps simplify things. Have your employee complete a nonresidency certificate to excuse him/her from tax withholding in the work state. Let your payroll provider know that your employee has an agreement in place.
If there’s no reciprocal agreement, your employee will most likely have to pay both nonresident and resident state income tax. But luckily, most states grant a tax credit to avoid being taxed twice.
Each state may have its own twist on taxation, so it’s best to check the local situation and not make any assumptions.
The unemployment tax situation is usually straightforward. When an employee is working in multiple states or working remotely for a company based in another state, you withhold state unemployment tax only in the state in which the employee is working.
When it gets complicated
Today’s remote-work world means situations that were rare or unheard of a generation ago are now commonplace. That means more tax complexity.
For example, consider an employee who works from his log cabin in upstate New York, but your company is located in Maryland — you’ll have to pay all state taxes to New York because that’s where the work is actually being completed.
Or at that same Maryland company, you have an employee who needs to work in Maine temporarily for three months. For nine months, you pay taxes in Maryland, and for three months, you pay taxes in the Pine Tree State.
Most of this information is general. It can get complicated, and there are exceptions and special circumstances. Consult with a tax professional at Urbach & Avraham, CPAs to review your cross-border workforce, and we’ll help you organize your payroll tax system accordingly.