2.9 State Income Taxation and Railroad Retirement

if a California resident works in Arizona, Arizona withholding is required if the employee is physically present in Arizona for __________________. In general, an employer is always subject to the laws of any state in which it has an employee performing services, whether or not the employer has a facility (such as an office, factory, or store) in the state.

60 days or more

For multi-state income taxation: The default rule of state income tax withholding, which can be used as a starting point, is to withhold income tax for the state in which services isnt performed. TRUE or FALSE

False : The default rule of state income tax withholding, which can be used as a starting point, is to withhold income tax for the state in which services are performed.

Define: Withholding Rule No. 3: Resident/nonresident taxation policies.

If an employee is a resident of one state but performs services in another and there is no reciprocal agreement, you must consider the laws of both states. The correct determination of the state of residency (Rule No. 1) is very important in these situations because it tells you which state's laws you may need to consider in addition to those of the state in which the employee works.

Define: Withholding Rule No. 2: Reciprocity.

If an employee performs services in a state other than the state of residence, you must determine whether the two states have a reciprocal agreement. A reciprocal agreement allows you to withhold only for the state of residence, as opposed to the state in which services are performed. (This is an example of why the rule of thumb is only a starting point.)

an employee who lives and works in one state may still be a resident of another state; this is where Withholding Rule No. 1 comes into play. What is the outcome?

In this scenario, the employee may have income tax liability for the state of residency and, if you have operations in that state and meet certain other criteria, you may be required to withhold for the other state as well as the work state

If the California resident works exclusively in Arizona for six months and if the employer has nexus with California: Arizona withholding is required (the 60-day threshold is exceeded), and California withholding is required, with a credit for income tax withheld for the work-state (Arizona).

In this situation, the employer must first calculate and withhold Arizona income tax. The employer must then calculate California income tax on the same wages and, if the California tax is greater, withhold an amount equal to the difference between the California income tax and the Arizona income tax. If the California tax is less than the Arizona tax, no California tax is withheld. If, however, the employer does not have nexus with California, the employer is not subject to the laws of that state and is not required to withhold that state's income tax. However, the employee may have personal income tax liability on these and all other earned wages by virtue of being a resident of that state.

An employee who works for you only during the nine months of the school year, for example, might try to claim residence in the state where the employee grew up but now spends only three months of the year. This claim may be more likely if the employee's home state doesn't have an income tax. What are the options for the employer:

It is up to you to locate and follow the rules of the appropriate state. Most states have a two-pronged definition of residency, outlining an individual is a resident either by: Being domiciled in the state, or Spending more than a certain number of days in the state.

What is the withholding rule number 1?

Resident defined. The first determination that must be made is the state of residence of the employee. This is primary because a resident of a state is subject to the laws of that state, including its income tax laws. Furthermore, states have varying policies on withholding from residents who perform services in another state and from nonresidents who perform services within the state. To locate and apply the policies correctly, you need to know which state(s) can claim the employee as a resident.

Under the ____________________________________________________________, the spouse of a servicemember may instead elect to use the same residence as the servicemember for purposes of taxation regardless of the date on which the marriage of the spouse and the servicemember occurred.

Servicemembers Relief Act as amended by the Veterans Benefits and Transition Act of 2018.

Nine states do not have tax withholding, which are they?

State tax, It can be applied in most situations when an employee lives and works in the same state (assuming it is not one of the nine states without income tax withholding—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming).

True or false: Also, in some states, withholding and paying over taxes may thereby establish nexus, making your company open to being sued in the courts of that state.

TRUE: Also, in some states, withholding and paying over taxes may thereby establish nexus, making your company open to being sued in the courts of that state.

For rule no 3.TRUE or FALSE: he state in which the services are performed will almost always require withholding from nonresidents who come into the state to work (withholding only from the wages for services performed in that state)

TRUE: he state in which the services are performed will almost always require withholding from nonresidents who come into the state to work (withholding only from the wages for services performed in that state)

What are the benefits of reciprocial agreement?

The general purpose of reciprocity is to make things administratively easier for the employee and employer. The employee will have to file only one state personal income tax return and the employer will withhold only for the state in which the employee lives. This is especially helpful if you have an employee who performs services in two or more states that have reciprocity with the state of residence.

What does domicile mean?

The term domicile usually means the place where an individual has a true, fixed, permanent home and principal establishment, and usually means the place where the individual intends to return.

For example, if an employee who lives in Kentucky and works in Kentucky, Illinois, and Indiana, and submits certificates of nonresidence for Illinois and Indiana, the employer will need to withhold only Kentucky income tax because the three jurisdictions have reciprocal agreements with each other. Without reciprocity, the employer would have to withhold for all three jurisdictions based on the time worked in each one. True or False?

True

TRUE OR FALSE: For withholding rule no. 1: If an employee has relocated to work for you, the employee may assert the former state is the state of residence because of maintaining a home and family there (and doesn't want to complete personal income tax returns for two states).

True: If an employee has relocated to work for you, the employee may assert the former state is the state of residence because of maintaining a home and family there (and doesn't want to complete personal income tax returns for two states).

For example, nonresidents of Washington, DC, who are residents of Maryland or Virginia, must complete Form D-4A, Certificate of Nonresidence in the District of Columbia, if they are working in DC. What is this an example of?

Withhholding rule number 2.

if an employee lives in one state and works in another, what rules apply?

each state's laws of reciprocity (Withholding Rule No. 2) and resident/nonresident taxation policies (Withholding Rule No. 3) must be examined.

Effective since 2009, the Military Spouses Residency Relief Act provides that a spouse of a service member retains residency ________________________________for tax purposes if the spouse moves to another state to be with the service member who is in the state due to military orders.

in the spouse's home state

If an employer does not have nexus in a state for which one of its employees will have a personal income tax liability what are the options?

it can choose to establish a withholding account in that state and begin withholding as a courtesy to its employees. However, the payroll department should check with the corporate tax and legal departments of the company first because once you voluntarily register for one tax, you may receive inquiries from the state about other taxes for which you are not liable, such as sales tax or corporate income tax

Under the mililtary Residency Relief Act: The employee's state of residence may also need to be considered even if the employee doesn't work there. If the employer has a business connection (nexus) with the state in which the employee resides, the employer is subject to the laws of that state and _______________________________________........

may be required to withhold that state's income tax, in addition to the tax for the state in which the employee is working.

The word ____________ literally means connection._______________ is established by having a business presence in a state. An office, store, or factory will create ______________, as may the mere entry of an employee into a state to make a sale or perform a service call. With more employees working remotely, you will also need to consult the state's definition of _________________ and remote workers.

nexus

If an employer does not have nexus with an employee's state of residence, but there is a reciprocal agreement between the two states, what must be honored?

the employer must honor the reciprocity agreement and not withhold income tax for the state where the employee works.However, the employer is not obligated to withhold income tax for the state where the employee lives because the employer does not have nexus with the resident state (the employee will have to make estimated payments).

For Withholding rule no 2. what is reported based on the boxes 16-17?

you report wages only to the state of residence when completing Boxes 16-17 (state wages and income tax) of federal Form W‑2. In most cases, the employee will be required to submit a certificate of nonresidence for the work state before you can honor the reciprocal agreement.