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June 20, 2013 | Payroll Software | Posted by Vicki Lambert, CPP

Multistate Employees: There’s No Way Around It, It’s A Lot Of Work!

Being responsible for payroll that has employees located in different states is a difficult task. You must be familiar with the taxes, both on the state and local levels, as well as the wage and hour laws. But when an employee lives in one state and works in another or works in two or more states, in other words a multistate employee, your workload for this employee can double or even triple. When I do webinars on this subject I often hear attendees comment that to keep it simple they tax the wages for the state where the employee lives. And yes, that does keep it simple. But it also keeps it, in most cases, totally out of compliance. Simple is not what payroll is striving for in the case of multistate employees—it is compliance. The simple truth is handling multistate employees is a tremendous amount of work!

In general, for an employee who lives in one state and works in another the income tax withholding falls under the jurisdiction of the work state. But sometimes the employee may have a say in determining which state gets the tax. Using rules set up under what are called reciprocal agreements, states have work out the taxation ahead of time and the employee only has to submit the proper paperwork to his or her employer. A non-resident employee can opt-out of paying the working state taxes in favor of their home state taxes. For example a resident of Wisconsin who works in Illinois who doesn’t want to pay Illinois state income tax simply completes a Form IL-W-5-NR. Once this is received, the payroll department ceases deducting for Illinois state income tax. If the employer chooses, it may deduct for Wisconsin but is not required to by law. Many of the 41 states that have income tax have reciprocal agreements with other states. But just as many states do not. As mentioned above, Illinois has reciprocal agreements but Rhode Island does not.

To add to the workload, employees who work in two or more states usually require payroll to track or calculate the amount of wages earned in each state which is then taxed according to each state’s requirements. But the reciprocal agreements still apply. So if our employee in the first example lived in Wisconsin but worked in Illinois and Iowa the Form IL-W-5-NR could still be submitted. Since Iowa and Wisconsin have no agreements in effect payroll would withhold Iowa tax on the portion of wages allocated to that state. But payroll would still not deduct for Illinois.

So we can all agree that having multistate employees creates a lot of work for payroll departments. Unfortunately, until all 41 states have reciprocal agreements with 41 states it is going to remain so.

To watch the entire presentation on Multistate Taxation and a few other webinars surrounding the world of payroll, visit the Ascentis 2013 Webinars Directory.

Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor™, a firm specializing in payroll education and training. The company’s website offers a payroll news service which keeps payroll professionals up-to-date on the latest rules and regulations. With 40 years of hands-on experience in all facets of payroll functions as well as over three decades as a trainer and author, Ms. Lambert has become the most sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States that have been attended by executives and professionals from some of the most prestigious firms in business today. A pioneer in electronic and online education, Ms. Lambert produces and presents payroll related audio seminars, webinars and webcasts for clients, APA chapters and business groups throughout the country. Ms. Lambert is also an adjunct faculty member at Brandman University in Southern California where she is the instructor for American Payroll Association’s “PayTrain” online program.