During the past several weeks, I’ve spoken with multistate companies that are completely unaware that they may have (and probably do have) a responsibility for withholding income tax on the wages their employees earn outside of their home state. About 15 years ago, this issue surfaced in the consulting industry following an issue that Andersen Consulting had with not handling withholding properly for employees who traveled and worked extensively in other states.
A quick look at the rules shows great diversity in what companies need to do. Some states require withholding starting day-one of employment in their state. I’m not aware of anyone who does this. Other states-like Georgia- set some deminimis limits. $5,000 of wages or 23 days per quarter before withholding is required. Other states have similar limits.
To the employee, this would mean filing multiple state income tax returns. Their home state would give credit for taxes paid to other states, so their may not be an actual tax cost unless the home state is Florida, Tennessee, Texas or a similar state that does not have an income tax.
In general, states are allowed to tax income earned or sourced to their state. This rule applies equally to companies and to individuals. This problem has usually been discussed in the context of athletes or entertainers, but the rule applies equally to consultants, contractors, or engineers who work in multiple states during a year.
For companies that have failed to do withholding, they may be 100% liable for any tax, interest, or penalties that should have been paid. For example, if an employee who lives in North Carolina but comes to Georgia to work for 3 months during the year and earns $30,000, that employee would owe Georgia income tax on the $30,000 and would file as a non-resident. North Carolina would allow a dollar for dollar credit for the Georgia tax paid. His employee would need to do withholding on the wages and would send a W-2 with multiple state withholding being shown. If the employer did not do this, it is highly unlikely the employee would make Georgia estimated payments. Under audit, the employer could be held liable for the tax that should have been withheld and would be fined with penalties and interest. This liability could go back many years.
As states continue to struggle for revenue, they may focus more on this tax. For companies that routinely deploy employees to other states to work for extended periods of time, this could be a large and completely hidden tax liability.
Ned Lenhart
Multistate income tax witholding
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