The following section of information is provided to give a conceptual overview of work/resident state withholding rules and the components essential to the functionality contained within ReloAdvantage. As state income tax laws are complex and circumstantial, this document should not be construed as offering payroll, accounting or tax advice. Clients are encouraged to consult with their own independent advisors regarding withholding compliance and regulations.
Under state income tax provisions, states generally have the authority to tax the income of their residents as well as the income earned in their state by non-residents. When an individual falls under the authority of multiple states by living in one state (resident) and earning income in another (work) then the potential for multi-state withholding becomes a factor which needs to be analyzed. There are several factors that must be considered in the analysis to determine the method and necessity to withhold. The following are the key components that must be understood in order to comply with the income tax laws of multiple states.
Nexus
A state’s authority to impose taxes is limited by the U.S. Constitution and requires that a nexus must be established in order to do so. A nexus is defined as a “definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax” (Miller Bros. Co. v. State of Maryland, 347 U.S. 340,345 (1954)). The connection established by a resident of a state is generally self evident. However, the connection between a state and a non-resident is not always easy to resolve. Additionally, the Employer’s connection to a state can impact the taxing requirements of the individual performing the work.
This is an import concept to understand as it can significantly impact the rules that will apply to a particular situation. Please note that rules provided by Equus do not assume an employer nexus exists.
Residency
Although it would seem relatively easy to discern, the determination of residency and the requirements therein can vary significantly between states. Among the various methods to determine, some states define residency by domicile and others by time spent within the state.
Income Sourcing Rules
The determination of the amount of income subject to a particular state’s jurisdiction can vary as well. Generally residents are subject to tax on entire income regardless of source while non-resident income may be determined by various allocation methods.
Reciprocal Agreements
To ensure that employees who work and reside in different states are not subject to multiple withholding or taxation several states have entered into reciprocal agreements. Reciprocity agreements excuse the resident employee from the resident state withholding on wages that are being imposed a withholding tax by another jurisdiction.
Listed below are the available Multi State Withholding Rules. With each rule there is explanation of what the rule means and how the Work/Resident withholding will be calculated.
Conditional Resident State W/H (MSRS) - Resident State withholding will be calculated only if the Work State does not require withholding.
Full Resident State W/H Required (MSFU) - Resident State withholding is required regardless of the Work State requirements.
Resident State Receives Excess W/H (MSEX) – Resident State receives the excess withholding over that of the Work State calculation. For example if the Resident State rate is 6% and the Work State rate is 4% then Work State would receive its required 4% and the Resident State would receive 2%.
Resident State W/H Not Required (MSNT) (System Default) - Resident State withholding is not required. This is the system default when no rule exists for a work/resident combination. Only the Work State withholding is calculated.
State Reciprocity, No Work State W/H (MSSR) – An agreement exists between the Work and Resident State for which the Work State excuses the normally required withholding. In this case only the Resident State withholding will be calculated.