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 and 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 withheld from other states? What are the employer's state payroll tax responsibility, does the company have to withhold 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 in Payroll Resources.

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.