I received an inquiry and I don't know how to deal with it.
A person is employed by a company in one state, but he works remotely in another state. The employer is not qualified to do business in the employee's state, does not want to qualify, and does not want to withhold taxes for work done in that state.
What's the best approach for dealing with this? What can be done?
Thanks for any thoughts you may have.
I'm not sure there is anything you can do other than understand the employment and withholding tax laws of the two states, the consequences of failing to comply with the laws, and communicate this knowledge to the client.
Where taxes should be withheld is not always obvious. For instance, NYS maintains that any employee of a NY company is a NY employee even if working outside of NY UNLESS the out-of-state work location is for the need of the employer. In other words, you can't avoid NY income tax by offering to work at home.
Ira Smilovitz, EA
I should add to my reply, since you didn't identify whether the employer or the employee is asking. If it's the employee, they may have to file a non-resident return in the employer's state to recover withheld tax. Presumably, the employee's resident state will offer a credit for any tax paid to the employer's state. Cash flow might be an issue considering the employee may have to make estimated payments to the resident state while waiting to recover withholdings from the employer's state.
Ira Smilovitz, EA
Thanks Ira. The inquiry was from the employee, and he works from Hawaii. The real question was, can the employer be forced to withhold tax for Hawaii if the employer does no work there. It sounds like the answer to that (at least in the abstract) is no.
Well, if the employee doesn't mind causing trouble and possibly losing his job, he can see if there is anything to be gained by reporting the situation to the relevant HI authority. There could be an issue with a potential future WC or DI claim. Theoretically, of course.
Ira Smilovitz, EA
Seems to me that the employee will regret it when Hawaii fines him for underpaying his state income tax. Federal and state tax authorities exchange info so they will know how much he made.
The employer may also be on the hook for state unemployment and other taxes. Perhaps the response to the employee is to remind him that not paying the taxes he owes is unlikely to turn out well. If he thinks they're withholding too much, he gives the employer a HW-4 form with the right amount and the employer adjusts it.
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