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How to Determine State Income Tax Withholding for Employees Who Work in More Than One State

Author: Alice Gilman

An employer that has employees who routinely work in more than one state (e.g., traveling salespersons, consultants, regional managers) must successfully navigate a complex web of state, and possibly local, laws to correctly withhold income taxes from the employees' pay. The responsibility to withhold a state's or locality's income taxes depends on:

  • Whether the employer has nexus with the jurisdiction;
  • The employee's state of residence;
  • The length of time the employee spends working in the jurisdiction;
  • The amount of wages attributable to work performed by the employee in the jurisdiction;
  • Whether an income tax reciprocity agreement applies; and
  • Whether there are any applicable federal or other state exemptions from income tax withholding.

Correct withholding is essential. An employer that fails to properly withhold income taxes from the pay of employees, or to report and remit the withholdings to taxing agencies as required, will be subject to costly noncompliance penalties and fines. Such failures may in turn open the door to an audit of the employer's activities regarding other types of taxes (e.g., nonpayroll business taxes such as sales, use, franchise and other corporate taxes) and other wage and hour practices. Even if an employer manages to sidestep these consequences, the hassle and time involved in having to make payroll tax corrections is something to be avoided.

This How To helps an employer determine which jurisdictions' income taxes to withhold from the pay of employees who perform work for the employer in more than one state.

For guidance on withholding for nonresident employees who go into their employer's state to work, and/or employees who work remotely (e.g., from home), please see How to Determine State Income Tax Withholding for Nonresident Employees.