About Multi-State Taxation

Employees who live in one state but work in another can create withholding problems and questions for the Payroll Department.  In general, if an employee lives and works in two different states, the employer must withhold taxes for the state where the services are performed.  However, while an employer generally has to follow this rule, it also has to consider the withholding requirements of the state of residence which may impose additional withholding requirements and responsibilities. This is only true if the employer has a presence in that state. Employers are not required to deduct taxes for states in which they have no employees working or present.  The following are some general withholding guidelines:

• Withholding For Residents Working Outside The State Most states have a general rule that require an employer withhold taxation on residents working outside of their home state. It is also true that many states have what are known as reciprocal agreements to assist in this area and to help avoid double taxation. Payroll departments have to consult with both the employee's resident state and work state to see what the reciprocal agreements may be.
• Nonresidents Employees who reside in one state and work in another are normally subject to the withholding rules of the state where the work is performed. However, if the employee works in more than one state, allocation of taxes may be required.

The definition of resident and nonresident is usually contained in the state's tax code.