Multi-state payroll
Multi-state payroll is the process of paying employees who work in, or reside in, more than one U.S. state.
You generally owe withholding in a state once an employee physically works there. One employee on a short-term assignment in a neighboring state can still create a filing obligation there. Registration typically has to happen before the first paycheck touching that state. State tax agencies typically require an active withholding account number before you can remit tax on an employee’s behalf. Failing to register and withhold where an employee actually works can bring back taxes, penalties, and interest.
Which state gets the withholding?
Where a reciprocity agreement exists, the employee typically files an exemption certificate with you. You then withhold only the resident state’s tax instead of the work state’s. Not every state pair has an agreement. Even where one exists, local taxes in the work state can still apply on top of state withholding. Applying one state’s default rule to an employee who qualifies for reciprocity results in incorrect withholding. Some states set a nonresident withholding threshold, a day count below which they do not require withholding on a nonresident employee’s pay.
| TERM | WHAT IT MEANS |
|---|---|
| Work location | Where the employee actually performs work, separate from your legal address and the employee’s home |
| Resident vs nonresident withholding | The home state generally taxes wages wherever earned; a work state generally taxes only wages earned inside its borders, though New York’s convenience-of-the-employer rule can count a nonresident’s telecommuting days as New York days |
| Nonresident withholding threshold | A day count below which a state does not require withholding on a nonresident employee’s pay; Connecticut, for example, does not tax that pay for 15 or fewer days present in a year (athletes, entertainers, and performing artists excepted), but past 15 days all pay for Connecticut work that year counts |
| Reciprocity agreement | A pact letting an employee who lives in one state and works in the other pay income tax only to the home state |
- Pennsylvania Department of Revenue, Income Subject to Tax Withholding; Estimated Payments; Penalties, Interest and Other Additions
- Connecticut General Statutes, Sec. 12-711. Determination of income, gain, loss and deduction derived from or connected with sources within this state
General information, not legal or tax advice. Apply current federal and state rules with qualified guidance.