Tax question: Nexus for company but for employees too?

wrote

More than likely you will find that withholding must be done in each state on the wages your employees earn in each state.

Start by contacting each state's tax withholding department to find out for sure.

My best guess is that you would only be dealing with the withholding tax issues, as your state of Indiana would handle any DOL claims for unelmployment, workers comp, etc - but check on that as well while you have them on the phone.

Well, states and localities are beefing up their enforcement of this type of thing (payroll tax, sales tax, business licenses, etc) as they seek out more funds to put in the tax coffers. Contractors are prime targets, as well as service providers. It's an easy thing to check also, cross reference your corporate return with the withholding reports, etc. If there are some, stop looking. If there aren't any, then send out a notice.

Echoing Paul: Your employees are individual income taxpayers in every state where they perform services on your behalf. In general, you must register as an employer with each of those states and withhold state income tax from your employees' wages and remit the tax to the state where the employee worked. Whether or not your company withholds or reports to the nonresident states, the employee remains liable for the state's tax unless his or her services there are below a statutory or administrative threshold, which is usually expressed in terms of either days worked or dollars earned in the state. Many states have no such "de minimis" rules, but at least theoretically tax, and require withholding from, the first dollar earned by the employee in the state. Also, frequently the de minimis threshold applies to the employer's requirement to withhold but not necessarily to the employee's responsibility to file and pay the tax.

I have told this story many times in this forum and elsewhere, but once again: In the late 1980s I worked for one of the major multinational accounting and consulting firms. The firm's consulting arm had a large contract (an ERP installation, IIRC) with a client headquartered in Denver. The firm had a number of fairly highly compensated individuals, nonresidents of Colorado, working on this contract for months at a stretch, and did not withhold Colorado state or Denver local income tax from the nonresident employees' wages. Somehow, perhaps through an audit of the client company, the Colorado DOR became aware of this. There was talk of criminal prosecution of the firm for failure to withhold. As you might imagine, the firm very quickly got into compliance, and for the past 20 years I would venture to guess that all of the larger multistate accounting, consulting, and law firms have required their employees to report on their time sheets not only the client for whom their services were performed, but also WHERE the work was done. Many smaller firms, however, remain unaware of their obligations.

There are exceptions, of course. Some pairs of states have reciprocal agreements under which a resident of one state working in the other owes tax only to the state of residence. An employee who is a resident of one such state and works in another would not be subject to tax in the state where the services were performed, and no withholding would be required. Where there is no such reciprocal agreement between the residence state and the source state, the general rule is that the residence state allows the individual taxpayer credit for the tax paid to the source state (the state where the services were performed), so in general, the employer should withhold for the source state and correspondingly reduce withholding for the residence state. However, there are a few pairs of states that stand in a reverse credit relationship whereby the source state allows credit for the tax paid to the residence state; in that situation, the employer should withhold for the source state only to the extent that its withholding requirement is greater than the resident state's for the same income and W-4 characteristics.

And of course there are a few states that do not impose individual income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee tax only interest and dividend income of residents; they do not tax wages of residents or nonresidents.

I know this is complicated, but it is important for both the company and its employees to be in compliance. Paul's advice to contact each of the states involved is excellent; that's a quick way to determine whether the company needs to withhold and the employee needs to file in each of the states.

Katie in San Diego

.

There must be some threshold criteria here, because employers do not pay out-of-state taxes every time they send an employee on an interstate business trip.

I suppose in the case of the diving service example, an entire contract is fulfilled by workers working out-of-state, and so the remote state wants tax on it, just as if it had been performed by an in-state contractor. I also know professional athletes pay tax in each state worked.

Is there a formula by which one figures whether it's an issue?

Steve

For a listing of states with reciprocal agreements and links to the necessary forms to complete, see:

Whoops.. forgot the link:

In addition, per an old post by Katie: "California, Arizona, Oregon, Indiana and Virginia stand in that reverse credit relationship with one another."

"Steve Pope" wrote

Unfortunately there isn't any generic solution. Each state sets floors on nexus, so in NC it might be one day and you have to withhold tax, while in UT it might be more than 4 days straight. And the impact on withholding, sales and income tax may vary within each state, such that what might trigger nexus for employee withholding might not be the same trigger for sales tax or corporate income tax.

I suspect though, that you'll find that there are multiple scenarios that would exempt trade show type workers who might be in state for a week at a time once a year, but not for the sales guy who makes a regular monthly run into another state to call on existing and potential customers.

As I indicated, some states provide de minimis exceptions by statute or regulation. These are generally expressed in terms of time (number of days) or dollars (amount earned). Often the de minimis rules limit the employer's obligation to withhold but do not specifically limit the individual's liability for the tax. However, if the de minimis exception applies for withholding purposes, generally the amounts are so small that it is not worth the state's time and resources to pursue the individual taxpayer.

No, there is no formula; it varies from state to state. Unfortunately there is no solution to this problem other than to deal individually with each state.

Katie in San Diego

Thank you for the discussion on my post. Looks like the best thing to do is to contact the states. We do quite a bit of work in states with which Indiana has reciprocity, but a few we do not. This gives me a good starting point. :)