June 20, 2013 | Payroll Software | Posted by Ascentis
Multistate Employees: There’s No Way Around It, It’s A Lot 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.