One State, Two State, Three State Withholding

Q. I have a question regarding payroll tax withholding, and personal income tax reporting. When an employee is a resident of state X, but works in state A, B anc C, as a travelling consultant. And where B has reciprocity agreement with state X. What are the employees income tax reporting responsibility. Does the employee have to file income tax in all 4 states, assuming the income threshold is satisfied? Can the employee,claim tax credits for taxes witheld from other states?What are the employer’s state payroll tax responsibility, does the company have to withold payroll taxes based on where the employee is working (A, B, and C)?

A.  This is a great question.  At my day job at Symmetry Software, we try to come up with scenarios like you described that are as difficult as possible to test the accuracy of our withholding calculations.  We have no idea if they really exist outside the theoretical realm.  If this situation is true, we’ll have to add this to the list that we test with for new versions.

To answer your question, yes, no and maybe for both scenarios.  Let’s tackle these situations one at a time.  If an employee is working in a state that has a reciprocal agreement with the state of the employee’s residence, the employer does not withhold, and the employee has no filing obligation in that state.  A good example of this is Indiana and Ohio.  The requirement is that the employee file a certificate of Non-Residence with the employer in the state where they do not live.  Withholding in this situation would only be in the resident state of the employee.  Certain situations cloud this answer but those go beyond the scope of this blog.  You can find copies of these non-resident withholding certificates on StateW4.

As for the other states without reciprocity with your home state, your employer should withhold in the state where you perform the work.  If you have taxes withheld for work performed in a state, you need to file a tax return in that state for those wages.  Depending on the amount of earnings, you may get a refund for all of that withholding.  Your home state obviously requires a tax return and may give you credit for taxes paid to the other states on those wages.  Much depends on the states involved.  Tax returns with the level of complexity you described are very involved and may require that you work with a professional tax preparer to make sure you aren’t paying too much in taxes.

Double The Tax Fun – 2 States!

Q.  I am having a difficult time trying to figure how much I owe in state tax.  I lived and worked in California from 1/1/2009 through 8/7/2009.  I began living in Colorado on 8/8/2009 through the end of the year and worked from home for the same company I worked for back in California.  State taxes were withheld for each state on the income made while living in each state (California withholding stopped when I moved to Colorado)  Do I owe California state income tax on the income I earned while living in Colorado?  If so can I get a credit as I was also taxed by Colorado on that income? Thanks!

A. Multi-state tax situations are always so much fun to decipher.  Over the last several years of my tax practice, I’ve prepared multi-state returns for Iowa, Missouri, Oklahoma and Montana in conjunction with Arizona.  Each state has different laws regarding what income must be counted.  However, residency is the most important.  In your case, if you have documentation showing that you physically relocated on the date you mentioned, then it becomes much easier to prove that your residency changed.  The company you work for is irrelevant to the solution.

California is one of those states with huge budget problems right now.  In an audit, they will try to prove that you did not change states completely.  Residency involves switching your drivers license, sale of the old home or cancellation of the lease, change of mailing address, car title address changes, voter registration changes etc.  If CA is able to prove that you only will be in CO temporarily, then they may determine that you owe CA tax on everything. I don’t know the tax law as well in CA, but they may provide a credit to you for tax paid to CO if it is determined that you actually owe CA tax on everything earned last year.  Check with your tax preparer.

Good documentation is key.  For this reason, I would visit a licensed tax preparer this year.  The complexities of dividing up income and maintaining adequate documentation as well as the right questions to ask to determine your true residency status is worth the price of the professionally prepared return.

Live in one state, work in another

Q. I live in Michigan and just started a new job working in Illinois.  I’ve never been in a situation with two states before.  My payroll department wants me to fill out all these different forms.  What should I do?

A. I love multi-state tax situations!  It’s like job security for accountants.  The answer to your question Read more »