state tax issues

A very broad question! From my experience... the answer is usually no unless the employee is sent on an extended assignment. I have limited experience in this area, but I have seen out of state withholding for assignment periods of anywhere from 3 to 6 months. I can't recall ever seeing out of state withholding for short durations. Here in New Mexico, the statute requires withholding on nonresidents who work in-state for more than 15 days. I would venture to bet that this rule is violated more often than not.

Not quite. I'm advising someone with their multi-state return, but find that state taxes of the other state were not withheld. After talking to many people whose company sends them out of state, I find that state taxes of the other state are routinely not withheld. So is it up to the employee to be honest and file tax returns in all the states? None of the states involved in my example have reciprocal agreements.

As an aside: If your main state is CA and your income is high enough that you're in the 9.3% bracket, then filing a return in another state is not a big deal because of credit for taxes paid to other states: you file a return for the other state, withhold taxes which will probably be less than 9.3%,subtract that amount from your CA taxes. So in net you've just transferred some tax revenue from CA to the other state, but have not caused yourself to pay more. However, if your main state is IL (rate is 3%) and you work in CA for a while, then you might end up owing $$ to CA if you file a CA return.

That's good advice, but there's not much incentive for following it because so many companies don't do it. If a company did start to do it, they would have more legal costs, but worse they could end up withholding more taxes on their employees (such as the TX company who sends their employee to CA), and the employees might notice this and prefer to work for a company that isn't so honest.

Technically if a company sends an employee to another state, the company has a presence in that state, and is required to comply with their laws. So my guess would be that it is up to the employer, from a legal standpoint.

Stu

I'm not sure what you meant. Employers are subject to the state withholding rules for nonresidents. The employee is responsible for filing as a nonresident where a filing requirement exists whether taxes were withheld or not.

Your second sentence is basically what I meant. Your third sentence is just good information. Thanks for the clarification.

Stu

Advising who? The employee (I assume) or the employer (I assume not).

Another reply from the esteemed Mr. Bronstein says that when an employer sends an employee into a state that this act alone is sufficient to create the legal presence necessary to require that the employer calculate and withhold - please note that I have paraphrased and extrapolated just a bit, but I do believe that I have kept with the intent of his original response.

Without doing the research, I would tend to agree with this statement. I'd also like to point out that it is essentially difference from what I said (or meant to say if I was unclear) about an employer NOT being required to withhold on a nonresident employee. If you live in state A but work at the employer's site in state B, the employer has NOT automatically met the physical presence test that would require them to withhold taxes for the employee who lives in state A.

However, when the employer sends the employee, who lives in state A, into state C, D, E, or F then I believe they HAVE met the legal parameters of physical presence and the EMPLOYER is now legally responsible to do the properly calculations and withhold taxes for each of those states. Though, if the employer has no office in the employee's state of residence and the employer never sends the employee to work in the employee's state or residence, the employer still has no legal requirement to withhold taxes for that state.

As a matter of practicality though, any employer with multi state operations, and who complies with the law, should have no trouble doing the right thing.

It is ALWAYS up to the employee to do the right thing as it relates to his personal return. Ignorance of the law is no excuse, though it is often used as one.

Correct.

INCORRECT regading your withholding statement from the preceeding paragraph - see your own observation from above. When an employer sends an employee into multiple states to work, they report the wages and handle the withholding for each state individually. Any paymaster with more than 2 good brain cells can run the calculations to account for the overlap - while they may not hit it exactly, they can get pretty close.

If I make half of my money working in state A and half working in state B then my employer should be reporting half of my wages as taxable to state A and half as taxable to state B (it isn't really this simple, but for most withholding calculations this will get you close enough to get started.) The same goes for withholding. The real caveat here is that an employee who has a tax liability to multiple states will likely NEVER be able to correctly prepare their own return.

At the end of the day, the employee may wind up paying a bit more in tax because he has to pay to multiple jurisdictions, but it won't be double or triple taxation. Either they will get a credit on their resident return for some or all of the taxes paid to the other states OR they will be able to exclude the income earned in the other states from taxation by their home state - the state treatment varies depending on the state.

Another related caveat to be mindful of whether the state is an "allocation" state or an "apportionment" state. Allocation states usually exclude the income earned elsewhere but allocation states include all of the income for the initial tax calculation THEN allocate the tax based on the ratio of income earned in the state to income earned everywhere. Apportionment is more prominent in states with diverse tax brackets that look more like IRS brackets. States where the brackets are close together and they max out the rate early - Maryland for instance where you are in the top bracket with just $3K in taxable income - are usually allocation states.

Sadly, while I hear your argument that employees might choose to work for companies that are more honest, the reality is that companies that play by the rules already know this and are either doing it right or (and frequently AND) are paying better to account for it.

Not to mention the fact that in this economy, most people are happy to have a job and will tolerate what they feel is wrong because it is better than being unemployed.

In your situation, were this my client and I KNEW he worked in multiple jurisdictions I'd have no choice but to do the returns correctly. Remember, at the end of the day as a paid preparer you are legally obligated to prepare an accurate return. If you don't you are guilty of fraud - and I don't care a lick if this is for your mother, if you commit fraud you deserve everything that will happen to you.

Gene E. Utterback, EA, RFC, ABA

I don't get this. What is CA? If you have 10k of CA source income, it might be taxed at a higher rate because of your income in other states -- the instructions have you calculate your net tax on all your income as if you were a CA income, which can yield an effective tax rate as high as 10.3% if you made millions of dollars in other states, and then multiply this ratio by your CA source income. Is this an example of "allocation" or "apportionment" in your terminology?

Apportionment.

Gene E. Utterback, EA, RFC, ABA

Is the repetition of the word "allocation" above a typo? Confusing...

"Allocation and apportionment" as most commonly used has to do with figuring out taxability by state of income for a multi-state business:

"Allocation: The direct assignment of nonbusiness income to a particular state. Apportionment: The proportionate assignment of business income to various states, based on a formula which varies by state but typically includes property, payroll and sales (3-factor formulary apportionment)."

...although the terms are used sporadically in other areas of tax law too.

I guess the terms could also apply to the method of figuring individual state tax rate for non-residents, but I've never heard them used that way before.

It is far more common to refer to the "California method" for this way of calculating tax rate, for example it is referred to by that name in some federal legislation, and of course by California itself, even though 18 or more other states use the method as well. It has been upheld in court as a legitimate method for calculating tax rate.

-Mark Bole

Nope, no type here.

It may be more common, but that doesn't make it more informative or correct.

As it related to my response to the OP - Some states only tax the income you earned in that state (these are allocation type states) WHILE Other states first calculate the tax on your total income, from everywhere, then apply a ratio of state income to total income to arrive at the state tax liability (there are apportionment type states).

I'm not sure that ""Allocation and apportionment" as most commonly used has to do with figuring out taxability by state of income for a multi-state business" is completely accurate, because it is becoming more and more common for it to apply to individual taxpayers. But it is essentially correct in that it is used to determine tax liability when multiple states are involved.

Gene E. Utterback, EA, RFC, ABA

Surely you didn't mean that "allocation" both includes and excludes the same thing (income earned elsewhere)?

I realize I'm picking a nit, but if we hope that anyone will follow along with terms like "allocation" and "apportionment", we'd best make them crystal clear and easy to remember.

One of our esteemed co-moderators, in another Usenet newsgroup, recently used some statistics from Google to demonstrate (rather convincingly, in my opinion), what was the most common interpretation of some particular language usage. I wasn't as sophisticated as him in terms of stating the problem in a logical, reproducible way, but I did indeed base my claim on some ad hoc search engine searches.

I also performed a cursory search of commercial tax databases, webboards, annual desk reference materials for tax pros, etc, and do not find state non-resident taxation described in terms of "allocation and apportionment" at all, with one exception for Ohio (see highlight in quote below).

The terminology is useful, because it puts a label on something that is otherwise time-consuming to describe (and it falls off the tongue more trippingly than "the California method"), but where oh where is it being used in a wide-spread fashion (or at least "more and more commonly") with regard to individual taxpayers?

[---quote from Ohio state tax guide-------] "Rather, in determining Ohio taxable income for taxable years ending after December 31, 2002 taxpayers claiming depreciation expensing under IRC §179 must add to income, prior to