Tax Requirements

Topics: Income tax in the United States, Taxation, Income tax Pages: 42 (9561 words) Published: November 19, 2008
Source: Payroll Administration Guide > State and Local Income Tax Withholding > Multistate Withholding Requirements: State Comparison Chart


Multistate Withholding Requirements:
State Comparison Chart

Employees who reside in one state but work in another can create withholding questions for payroll departments. The following chart illustrates the different state taxation and withholding rules applicable to such multistate taxation situations. In general, when an employee's state of residence differs from the state where the individual works, the employer must withhold taxes for the state where the services are performed. However, while an employer generally should first consider the withholding requirements for the state in which the work is performed, it also should check the rules for the employee's state of residence, which may impose additional withholding responsibilities on the employer.

The chart below covers the general multistate withholding rules issued by the states. The main categories included in the chart are: υ Withholding for Nonresidents — Individuals who reside in one state and work in another normally are subject to the withholding rules of the state in which they perform their duties or render services. Employees working in more than one state may be subject to allocation rules that divide up the withholding obligations or requirements among the states in which the work is performed.

υ Residents Working Outside the State — Most states have a general rule requiring that income taxes be withheld from residents' wages earned outside the state. However, most states also have some type of arrangement — e.g., reciprocal agreements with neighboring states or unilateral tax credits for taxes paid in another jurisdiction — designed to avoid double withholding and double taxation.

υ Reciprocity — A number of states have entered into reciprocal agreements with other states to ensure that employees who work and reside in different states are not subject to multiple withholding or taxation. Reciprocal agreements typically specify that employers should withhold income taxes on a nonresident employee's wages only for the worker's home state and that such employees' wages are not subject to the income tax rules of the state in which the wages were earned.

υ Severance Payments to Nonresidents— A number of states tax severance payments made to persons living in a different state which were earned while the individual worked in the taxing state.

The definitions of “resident” and “nonresident” usually are set forth in each state's income tax laws or regulations. While the state definitions of resident status vary, most states treat individuals as residents if they maintain a place of abode or live in the state for a certain period of time — e.g., over half the tax year. When using the comparison chart below, you may want to consult the individual state guidelines for determining residency status, and these are contained in the digests of state and local withholding requirements, beginning at 181:2101.

The state and local withholding requirements for interstate transportation workers are governed by special federal rules, and these rules are not covered in this chart. For information on the withholding and requirements applicable to interstate transportation employees, see the chapter beginning at 181:1101.

|STATE |REQUIREMENTS AND PROVISIONS | |Alabama | | | |Withholding for Nonresidents — Employers must withhold Alabama income tax from workers who earn wages in Alabama, regardless of the | | |residency status of...
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