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ISSUE 1
Some states require tax withholding on the first dollar earned. There are no minimums. Some states will have a “de minimis” rule that only requires withholding once employees have performed services for a certain number of days. These requirements can vary dramatically. New York, for example, does not require any state tax withholding for the first 14 days that a nonresident performs services in the state of NY. From the 15th day forward, employers are required to withhold. Under Arizona’s 60-day rule, employers are not required to withhold on nonresident earned wages for the first 60 days. On the 61st day, not only are employers required to begin withholding Arizona tax, but they must also retroactively go back and withhold taxes for the first 60 days of pay for work in Arizona. There may be instances that require withholding tax for both the resident state and the nonresident state. The resident state may claim to tax all the employee’s earnings, regardless of where the work was performed, and the work state also wants their share. With that, if the tax rate for the nonresident state is lower than what the resident state’s tax would have been, some state rules allow employers to withhold first the nonresident state’s (the work state’s) full tax amount, and then, additionally, withhold the balance that would be due for the resident state to make up the difference.
While several taxing states have reciprocity agreements between them to allow a worker who is resident in one state to continue to be taxed as if income was earned in the resident state, most do not. If there is a reciprocal agreement between the resident state and the work state, the employee (not the employer) generally is required to complete the work state’s nonresident certificate and submit it to the employer. If the employee fails to submit the certificate, the employer is then required to withhold, and employers are required to follow, the work state tax withholding requirements. State Exceptions For the wages earned in the nonresident state, you or your company would be required to understand the tax rules, if any, for each state in which the employee performed the services. “While several taxing states have reciprocity agreements between them to allow a worker who is resident in one state to continue to be taxed as if income was earned in the resident state, most do not.”
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