As employee travel, temporary assignments, project-based work, and remote work arrangements continue to increase, employers face growing challenges in identifying and complying with multistate payroll withholding obligations. Understanding the rules before employees cross state lines can help reduce audit risk, avoid costly assessments, and minimize administrative burdens for both employers and employees.
Understanding the Compliance Risks
Temporary work assignments across state lines can create significant tax compliance challenges for both employers and employees. For employers, failing to properly track where employees perform services can result in missed withholding, registration, and unemployment tax obligations, leading to assessments for unpaid tax, penalties, and interest.
The consequences are not limited to the employer. From the employee’s perspective, failing to identify multistate payroll tax obligations upfront can create significant tax filing complications. If it is later determined that the employee had a nonresident income tax return filing requirement and there was no state tax withheld, correcting this issue often requires preparing previously unfiled nonresident income tax returns, paying any resulting tax, interest, and penalties, and amending resident state income tax returns to claim credits for taxes paid to other states. This process can be time-consuming, costly, and frustrating for employees who reasonably expected payroll withholding obligations to be addressed through their employer’s payroll process.
State Rules Are Not One-Size-Fits-All
States take significantly different approaches to nonresident payroll withholding requirements. Some states require withholding from the first day an employee performs services within the state, while others provide de minimis exceptions based on the number of days worked, wages earned, or both. In addition, employers must consider reciprocity agreements between certain states, as well as varying registration and reporting requirements.
Looking Beyond Income Tax Withholding
Employers should also be aware that payroll tax compliance extends beyond state income tax withholding. Temporary work assignments may raise questions regarding state unemployment insurance reporting, particularly when employees regularly perform services in multiple states. While unemployment tax sourcing rules generally differ from state income tax withholding rules, employers should evaluate both sets of requirements when employees perform services across state lines.
How Bonadio Can Help
Managing multi-state payroll tax compliance can be complex, especially when employees work across multiple jurisdictions with varying rules and requirements. The Bonadio Group’s State and Local Tax (SALT) team can help organizations evaluate their payroll tax obligations, navigate state registration and withholding requirements, and develop processes to minimize compliance risk.
If you have any questions or are interested in learning more, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
