The following
information was provided in a seminar conducted by the American
Payroll Association.
From a basic rule of thumb to three rules
Withholding rule number 3: Resident/non-resident taxation policies
Nexus: Business connection
Withholding on residents working out of the state and
non-residents table
For Which State Must You
Withhold?
If your company
has operations in more than one state, you may be faced with
income tax withholding for more than one state. Sometimes, you may
even have to withhold income tax for more than one state from the
same employee. Withholding can get even more complicated when you
have employees who live in a different state than the one they
work in or who perform services in more than one state.
Deciding which state's income tax to
withhold can be a confusing process. How do you determine who is a
resident and whether you should follow the laws of the state of
residence or the laws of the state in which services are
performed? Not all states answer these basic questions in the same
way and, sometimes, state laws conflict. Even the simple word
"operations,'' as used in the paragraph above, is more complex
than you might think.
The default rule
of state income tax withholding that can be used as a starting
point is to withhold income tax for the state in which services
are performed. It can be applied in most situations in which tile
employee lives and works in the same state (assuming it is not one
of the nine states without income tax withholding: Alaska,
Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas,
Washington, and Wyoming).
However, up to
three other withholding rules may have to be considered when the
situation is not as straightforward. For example, an employee who
lives and works in one state may still be a resident of some other
state; that's where withholding Rule No. 1 comes into play. In
this scenario, the employee may have income tax liability for the
state of residency, and, if you have operations in that state and
meet certain other criteria, you may be required to withhold for
that other state. On the next level, if an employee lives in one
state and works in another, each state's laws of reciprocity
(withholding Rule No. 2) and resident/non-resident taxation
policies (withholding Rule No. 3) must be examined.
The very first
determination that must be made is the state of residence of the
employee. This is primary because a resident of a state is subject
to the laws of that state, including its income tax laws.
Furthermore, states have varying policies on withholding from
residents who perform services in another state and from
nonresidents who perform services within the state. To locate and
apply the policies correctly, you'll need to know which state(s)
can claim the employee as a resident.
Employees commonly claim that they are a
resident of their "home" state. If the employee has relocated to
work for you, he/she may assert that the former state is his/her
state of residence because he/she still has a home and family
there (and doesn't want to complete personal income tax returns
for two states). An employee who works for you only during the
nine months of the school year, for example, might try to claim
that she is a resident of the state she grew up in but in which
she now spends only three months of the year. This may be
especially likely if her home state doesn't have an income tax.
It's up to you to
locate and follow the rules of the appropriate state. Most states
have a two-pronged definition of residency, outlining that someone
will be a resident by either:
1.
Being domiciled
in the state, or
2.
Spending more
than a certain number of days in the state.
The term "domicile" usually means the place
where an individual has a true, fixed, permanent home and
principal establishment, and it usually means the place to which
the individual intends to return. Common indicators that an
individual is domiciled in a particular location include:
ˇ
Property
ownership
ˇ
Bank accounts
ˇ
Driver's license
and vehicle registration
ˇ
Voting
registration
ˇ
Presence of
family
ˇ
Club and church
memberships
For example, New
York claims as a resident anyone who is either of the following:
ˇ
Domiciled in the
state, or
ˇ
Maintains a
permanent place of abode and spends more than 183 days of the year
in the state
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STATE
DEFINITIONS OF A RESIDENT FOR INCOME TAX WITHHOLDING
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Alabama |
A person
having a permanent place of abode or who is domiciled in the
state and spends more
than seven months a year in the state
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Alaska |
Not
applicable
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Arizona |
A person
domiciled or who spends more than nine months a year in the
state
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Arkansas |
A person
domiciled in the state or who maintains a residence and spends
six months a year in
the state
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California |
Withholding
required for residents and nonresidents
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Colorado |
A person
maintaining a permanent place of abode or domiciled in the
state and spends more
than six months a year in the state
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Connecticut |
An individual
who is domiciled or has a permanent place of abode in the
state and spends
more than one half of the year in the state
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Delaware |
A person who
is domiciled, maintains a permanent place of abode, and spends
more than 183
days a year in the state
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District of
Columbia |
A person
domiciled or residing or has a place of residence in the state
tbr more than seven
months in the year
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Florida |
Not
applicable
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Georgia |
A person
moving in or out of the state is taxed only on income received
in the state
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Hawaii |
Any
individual domiciled or residing in the state. Reside is to
spend more than 200 days a
year in the state
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Idaho |
A person who
is domiciled, and maintains a place of abode for thc entire
year and resides in the state more than 270 day a year
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Illinois |
Any person
who is in the state for other than a temporary or transitory
purpose during the year
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Indiana |
Anyone who
resides, maintains a place of legal residence and spends more
than 183 days of the year in the state
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Iowa |
A person
domiciled in or maintaining a permanent place of abode in the
state
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Kansas |
A person
domiciled in, maintaining a permanent abode, and spending more
than six months a year in the state
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Kentucky |
A person who
is domiciled, maintains a permanent place of abode, and spends
more than 183 days a year in the state
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Louisiana |
Anyone
domiciled, maintaining a permanent place of abode, or who
spends more than six months of the year in thc state
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Maine |
A person who
is domiciled, maintains a permanent place of abode, and spends
more than 183 days a year in thc state
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Maryland |
Anyone
domiciled in the state on the last day of tile year or who
maintains a place of abode within the state
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Massachusetts |
A person who
is domiciled, maintains a permanent place of abode, and spends
more than 183 days a year in the state
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Michigan |
An individual
who lives in the state at least 183 days in the year
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Minnesota |
An individual
domiciled in the state or outside of the state who maintains a
place of abode and spend more than one half of the year in the
state
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Mississippi |
A person
domiciled in the state
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Missouri |
A person
domiciled or who spends more than 183 days of the year in the
state
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Montana |
An individual
who has a domicile or who maintains a permanent place of abode
within the state and has not established residence elsewhere
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Nebraska |
A person who
is domiciled, maintains a permanent home and spends more than
six months of the year in the state
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Nevada
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Not
applicable
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New Hampshire |
Not
applicable
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New Jersey |
Any person
domiciled in the state for the full year or is not domiciled
in the state but maintains a permanent home and spends more
than 183 days of the year in the state
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New Mexico |
A person
domiciled in the state
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New York |
A person
domiciled or who maintains a permanent place of abode and
spends more than 183 days of the year in the state
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North
Carolina |
Withholding
required for residents and nonresidents
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North Dakota |
An individual
domiciled, or who maintains a permanent place of abode within
the state and spends more than seven months of the year in the
state
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Ohio |
A person
domiciled in, living in, or who maintains a permanent place of
abode in the state and doesn't spend more than 335 days
outside of the state
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Oklahoma |
A person who
maintains a permanent place of abode, or is domiciled in the
state and spends more than seven months of the year in the
state
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Oregon |
A person
domiciled or who maintains a permanent place of abode and
spends more than 200 days of the year in the state
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Pennsylvania |
A person who
is domiciled in the state(unless a permanent place of abode is
maintained else where and no more than 30 days are spend in
the state) annually or is not domiciled in the state but
maintains a permanent place of abode in the state and spends
more than 183 days a year in the state
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Rhode Island |
A person
domiciled or who maintains a permanent place of abode and
spends more than 183 days of the year in the state
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South
Carolina |
A person
domiciled in the state
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South Dakota |
Not
applicable
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Tennessee |
Not
applicable
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Texas |
Not
applicable
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Utah |
A person
domiciled or who maintains a permanent place of abode and
spends more than 183 days of the year in the state
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Vermont |
A person
domiciled or who maintains a permanent place of abode and
spends more than 184 days of the year in the state
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Virginia |
A person
domiciled or who maintains a permanent place of abode and
spends more than 183 days of the year in the state
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Washington |
Not
applicable
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West Virginia |
A person
domiciled or who maintains a permanent place of abode and
spends more than 183 days of the year in the state
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Wisconsin |
A person who
is domiciled in the state
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Wyoming |
Not
applicable
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If an employee
performs services in a state other than the state of residence,
you must find out whether the two states have a reciprocal
agreement. A reciprocal agreement allows you to withhold only for
the state of residence, as opposed to the state in which services
are performed. (This is an example of why the rule of thumb is
only a starting point.) Accordingly, you would report wages only
to the state of residence when completing boxes 16-17 (state
wages) of federal Form W-2, Wage and Tax Statement. In most cases,
the employee will be required to submit a certificate of
non-residence for the state in which he/she works before you can
honor the reciprocal agreement.
The general
purpose of reciprocity is to make things administratively easier
for the employee and employer. The employee will have to file only
one state personal income tax return, and the employer will
withhold only for the state in which the employee lives. This is
especially helpful if you have an employee who performs services
in two or more states that have reciprocity with the state of
residence. For example, for an employee who lives in the District
of Columbia, works in D.C., Virginia, and Maryland, and submits
certificates of non-residence for Virginia and Maryland, the
employer will need to withhold only D.C. income taxes because the
three jurisdictions have reciprocal agreements with each other.
Without reciprocity, the employer would have to withhold for all
three jurisdictions based on the time worked in each one.
On the other
hand, the presence of a reciprocal agreement requires you to
change the state of withholding and reporting if the employee
moves his/her residence from one state to another, even though
there has been no change in the state in which the services are
performed.
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RECIPROCAL
WITHHOLDING AGREEMENTS BETWEEN STATES
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Alabama |
None
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Alaska |
Not
applicable
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Arizona |
None
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Arkansas |
Residents of
Texarkana, Arkansas are exempt from Arkansas state income tax
and withholding. Residents of Texarkana, Texas are exempt from
Arkansas income tax for wages earned in Texarkana, Arkansas.
Agreement does not apply to residents of other cities or other
Texas residents working in other parts of Arkansas.
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California |
None
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Colorado |
None
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Connecticut |
None
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Delaware |
None
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District of
Columbia |
Reciprocal
agreements with Virginia and Maryland. Non-Residents of
District of Columbia filling out a Certificate of Nonresidence
are not subject to DC withholding unless they voluntarily
request the withholding.
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Florida |
Not
applicable
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Georgia |
None
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Hawaii |
None
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Idaho |
None
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Illinois |
Residents of
Iowa, Kentucky, Michigan or Wisconsin are not subject to
Illinois income tax withholding for wages earned in Illinois
if an Employee's Statement of Non-Residence in Illinois is
filed with the employer. The reciprocal agreement with Indiana
expired at the end of 1997.
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Indiana |
Residents of
Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin are not
required to have Indiana withholding. The reciprocity is not
applicable to county income taxes. The reciprocal agreement
with Illinois expired at the end of 1997.
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Iowa |
Residents of
Illinois have Illinois state tax withheld only if the
Employee's Statement of
Nonresidence in Iowa is filed with the employer.
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Kansas |
None
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Kentucky |
Resident of
Illinois, Indiana, Michigan, Ohio, West Virginia, and
Wisconsin have only their resident state tax withheld if a
Certificate of Nonresidence is filed with the employer. Daily
commuters between Kentucky and Virginia are provided
reciprocal benefits.
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Louisiana
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None |
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Maine
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None |
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Maryland |
No Maryland
tax is withheld from employees who commute daily to Maryland
and reside in the District of Columbia, Pennsylvania, Virginia
and West Virginia. A certificate of nonresidence must be filed
with the employer.
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Massachusetts
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None |
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Michigan |
Michigan
employers do not withhold Michigan state income tax from
residents of Illinois, Indiana, Kentucky, Minnesota, Ohio, and
Wisconsin. Michigan employees must file certificates of
nonresidence to be exempt from withholding. A form is not
provided.
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Minnesota |
Residents of
Michigan, North Dakota, and Wisconsin are exempted from
Minnesota withholding. A reciprocity Exemption from Minnesota
Withholding, Affidavit of Residency is required to certify
residency.
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Mississippi |
None
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Missouri |
None
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Montana |
Montana
employers are not required to withhold Montana income tax from
residents of North Dakota. A certificate of North Dakota
residency is required.
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Nebraska |
None
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Nevada
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Not
applicable
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New Hampshire |
Not
applicable
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New Jersey |
Pennsylvania
residents filling out a certificate of nonresidence are not
subject to New Jersey withholding.
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New Mexico |
None
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New York |
None
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North
Carolina |
None
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North Dakota |
Residents of
Minnesota and Montana working in North Dakota are not required
to have North Dakota tax withheld. An Affidavit of Residency
should be filed with their employer annually.
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Ohio |
Ohio has
reciprocal agreements with Indiana, Kentucky, Michigan,
Pennsylvania, and West Virginia. Employee's Statement of
Nonresidence in Ohio must be filed with the employer to claim
the exemption.
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Oklahoma |
None
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Oregon |
None
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Pennsylvania |
Pennsylvania
has reciprocal agreements with Indiana, Maryland, New Jersey,
Ohio, Virginia, and West Virginia. An Employee Statement of
Non-residence and Authorization to Withhold Other States'
Income Tax must be filed with the employer. For New Jersey
residents who work in Pennsylvania, the amount of any
Pennsylvania local income tax withholding reduces the amount
of New Jersey income tax to be withheld from those same wages.
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Rhode Island |
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