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by Jen Leigh on August 10, 2023

Payroll Tax Changes That Occur When an Employee Changes States

It's not uncommon for employees to relocate to different states for various reasons, such as personal preferences, family obligations, or career opportunities. While such a transition brings about its own set of challenges, one crucial aspect that requires careful attention is managing the payroll tax changes that arise when an employee moves to another state.

Every state has its own unique tax laws, regulations, payroll tax obligations, and filing requirements, making it imperative for employers to understand the intricacies involved in cross-state payroll and taxation.

Employer's Obligations to State TaxesPayroll Solution Feature List CTA Vertical

When it comes to state taxes, employers have several obligations they must fulfill. These obligations can vary depending on the specific state and its tax laws. Common employer obligations to state taxes include:

Withholding State Income Tax

Employers are responsible for withholding state income tax from their employees' wages. The amount to be withheld is determined by the employee's taxable income and the state's tax rates, which may vary from federal income tax rates. Employers must accurately calculate and withhold the correct amount of state income tax from each employee's paycheck.

State Income Tax Reporting

Employers are responsible for reporting state income tax withheld from employee wages. This typically involves filing periodic payroll tax returns, which provide details on the wages paid, state income tax withheld, and other relevant information. Employers must ensure they meet the state's reporting requirements, including filing deadlines and necessary forms.

Compliance with State-Specific Laws and Regulations

Employers must stay updated on state-specific tax laws, regulations, and any changes that may affect their tax obligations. This includes understanding state-specific deductions, credits, exemptions, and any other requirements related to payroll and taxes. Through a cloud-based compliance solution these tasks can be completed in a simplified year-end process.

State Disability Insurance (DI) Tax

In states with disability insurance programs, employers may be required to contribute to the state's DI fund. This tax helps provide benefits to employees who are unable to work due to non-work-related illnesses or injuries. Employers must determine if they are subject to DI taxes and accurately report and remit these taxes to the state.

Multi-State Payroll Tax Withholding

Employers are responsible for withholding state income tax from an employee's wages if the employee is subject to state income tax. It's crucial to note that an employee working in a different state is considered an employee of the state where they work, not where the business is located or where the employee resides.

Therefore, employers must comply with each state's specific tax withholding requirements. Each state has its own set of rules and regulations regarding tax withholding for out-of-state employees, and employers need to understand and adhere to these requirements accordingly. States like Alaska, Florida, South Dakota, Nevada, New Hampshire, Tennessee, Texas, and Wyoming don't have state withholding tax requirements.

When an employee resides in a state that does not have a tax withholding requirement but commutes to a state where withholding taxes are mandatory, it is crucial to note that taxes must be withheld for the state where the employee works. In such cases, the employer is responsible for accurately withholding the required amount of taxes from the employee's wages based on the tax regulations of the work state.

Local Tax Withholding

In addition to fulfilling state requirements, conducting research on any necessary local tax withholding registrations is essential when hiring an out-of-state employee. It is important to thoroughly review state wage and hour laws, encompassing aspects such as minimum wage, overtime regulations, pay frequency, and exemptions. These laws can vary from state to state, so it is crucial to understand and comply with the specific regulations applicable to the state where the employee will be working.

States with Reciprocity Agreements

Reciprocity agreements are agreements between certain states that allow employees who live in one state but work in another to pay income tax only to their state of residence. Under this agreement, residents of one participating state who work in another participating state are not subject to income tax withholding in the state where they work.

It's important to note that reciprocity agreements are specific to certain states and may have specific rules and conditions. Indiana, Kentucky, Michigan, Illinois, and Wisconsin have a reciprocity agreement, while North Dakota, Montana, and Minnesota have reciprocal agreements.

The Bottom Line

When an employee changes states, several payroll tax changes come into play, including adjusting withholding tax, complying with state income tax laws, and considering reciprocity agreements where applicable. It's crucial for employers to stay informed about payroll state changes to ensure compliance with specific tax requirements of the new state, avoid penalties and support a smooth transition for their employees. Get in touch with us to learn more about the Payroll solutions we have to offer.

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Jen Leigh

Jen Leigh is a Senior Product Specialist with Inflection HR's Cloud Based HR and Workforce Management Solutions. Connect with Jenni and the rest of the Inflection HR Team on Twitter, Facebook, or LinkedIn.