Remote and traveling employees have long been a choice for many companies. However, at present, many many more companies are electing to move their operations completely online. For businesses that have recently made these decisions, or are currently in the process of making them, a lot of questions can arise. One in particular is tax withholdings, as employees working in other states leads to the need for multi-state withholdings.
What Are Multi-State Withholdings?
As an employer, you already know that you need to withhold and deposit payroll taxes. These withholdings cover obligations such as income tax, social security, and Medicare at the federal level. In addition to these, you are also responsible for withholdings for state level requirements.
While this is pretty straight forward when your business operates out of a brick and mortar location or office space, the web gets pretty tangled when operations start to spread out across the country. State level withholdings vary from state to state.
Employees vs. Independent Contractors
So you have a person you hired who is working in another state. The first determination to make is: 'is this person an employee or an independent contractor'? That question needs to be answered not by you but by the state and federal laws that classify employees versus independent contractors.
Determining what needs to be withheld isn't always so streamlined, unfortunately. When figuring out multi-state withholdings for your employees, you'll want to ask yourself a few questions first:
- Is your employee an in-state or out-of-state employee? Non-resident states refer to any situation where your employee travels somewhere where they are not a permanent resident. Resident states, on the other hand, are when an employee lives and works in the same state.
- Does the employee travel to another state to work or is he working in the same state where your business is based?
- Does your employee conduct business for an extended period of time in other states?
In addition to these questions, you'll want to keep a few additional items in mind:
- There are no state taxes for Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If your employee lives and works in one of these states, you will not need to worry about state tax withholding.
- In most situations, the taxes must be withheld from the state in which the employee does the work. The only exception is if the state in which they work has a reciprocal agreement with their home state. Some states collaborate on taxes so do your due diligence on this one.
- Some states have a maximum number of days an individual may work within the state before beginning to pay state taxes while others may require payment of taxes from day 1. These laws vary from state-to-state.
- If an employee does work in multiple states, there is a strong possibility you may be required to withhold state taxes for all of them. Again, this is on a case-by-case basis and determined by the states various laws.
Depending on the structure of your operation, however, you may not have full-time or part-time employees but rather 1099 contractors. The good news is that an independent contractor is paid directly without any taxes withheld, so you won't need to be concerned about withholdings.
However, an occasion may arise where you may have to withhold income taxes. The IRS could send you a backup withholding notice. In the event this situation unfolds, you'll have to follow their instructions and withhold income taxes from the 1099 independent contractor.
Calculating the Correct Withholdings
When calculating multi-state withholdings, you'll need to consult each state's rates for withholdings. You'll find that most states utilize tax tables to dictate withholding amounts. These are based on an employee's annualized income and exemptions. However, some states will tax everyone at a flat percentage.
Will I Need To Worry About Unemployment Taxes?
In certain states you may need to become familiar with other areas that may require withholdings. While most states regard unemployment as an employer-only tax, others also designate that employees are also taxed. Be sure to brush up when hiring an employee from a new state or making the decision to shift operations online.
What Should I Do If An Employee Is Subject to Multi-State Withholding?
First things first, you'll need to register with each state's taxing authority and acquire an ID from said state. As we mentioned previously, each state calculates their taxes either by a tax table or by a flat rate percentage. These will help you determine the correct withholding amount. From that point on, you'll make regular deposits. Be sure to consult the state's rules regarding filings and submit deposits on time or you may be at risk of a penalty.
When In Doubt, Consult a Professional
As you can see, there are a lot of moving parts to multi-state tax withholding. It may be a wise choice to hire a CPA specializing in business accounting to help you navigate this murky and confusing dilemma. Chandler & Knowles CPAs constantly keep up-to-date on the latest tax changes and are familiar with state-to-state tax withholding requirements. Let us help you make sure you have all your ducks in a row when it comes to payroll management. Contact us today to get started.