Multistate Employment
If you only do business in one state and all of your employees are residents
of that state, your state income tax withholding obligations will be quite
simple. However, complexities can arise once your operations expand beyond the
borders of a single state.
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Let's assume you have a California office where you employ
five California residents. You also have a second office in
Oregon, where you employ two Oregon residents. Your employees
never leave their state of residence to work in the other,
out-of-state office. You would have to withhold California
income taxes from the wages of your five California employees
and Oregon income taxes from the wages of your two Oregon
employees. In other words, you'd have separate withholding
obligations in each state.
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A more difficult situation arises when you send your employees to other
states to perform services or employ residents of other states at a single
in-state site. For instance, let's change the facts from our example and assume
that you have just a California office where you employ five California
residents. You regularly send two of the employees into Oregon to perform
services on your behalf. Must you withhold Oregon income taxes from any of the
wages you pay those two employees? Or, assume instead that three California
residents and two Oregon residents comprise the employees at your California
office. Must you withhold Oregon income taxes from any of the wages you pay the
two Oregon residents if they only perform services for you in California? How
about California taxes? What if they're the employees you send when there's work
to be done in Oregon or you allow them to occasionally telecommute from their
Oregon homes?
These are just a sampling of the types of questions you could face.
Unfortunately, they also represent the types of questions that even the most
experienced tax professionals cannot always easily answer.
Before you conclude whether you have a state income tax withholding
obligation with respect to a given employee, you'll need to understand the rules
of both the states where you're doing business and the states whose residents
you're employing. And, if you have any doubts as to the proper conclusion, seek
the advice of your accountant or other tax professional. That being said, here
are some general points to get you started:
- Some states have entered into "reciprocal agreements" with other
states. Usually under these types of agreements, state A agrees that it
won't require state A employers to withhold its income tax from wages paid
to residents of state B, and state B reciprocally agrees that it won't
require state B employers to withhold its income tax from wages paid to
residents of state A. So, if you do hire employees who are residents of
other states, a good first step is to confirm whether your state has any
reciprocal agreements in effect with those other states and, if so, whether
the agreement relieves you of any withholding obligations. Our state
income tax map includes information about the reciprocal agreements in
force in each state.
- Because withheld taxes are taxes the employees personally owe, you won't
have to withhold a state's income tax on a given employee's wages unless the
employee's income is subject to the state's tax. This usually requires that
the employee be a resident of the state, or be a nonresident who derives
income from sources in the state. Generally speaking, merely performing some
services in a state as an employee will not alone cause the employee to be
subject to the state's income tax if the employee's principal place of
employment is outside the state.
- A state's taxing powers reach only as far as its borders. So, unless you
and your business establish some kind of physical presence in a state, the
state probably can't force you to withhold its income taxes. Common examples
of the types of activities that can be considered a "physical
presence" include maintaining an office, store, or other business
facility in the state; having employees in the state who regularly perform
services, make sales, or otherwise do business on your behalf; and owning or
leasing any property that is located in the state.