5 New Tax Impacts On Out-Of-State Employees

Think about what your workplace looked like 15 years ago. Look around it now. In addition to some new faces, new technology, and, maybe, new furnishings, one of the main things that you might notice is what isn’t there at all – many of your co-workers.
The Internet and cloud computing has enabled nonprofits to employ more and more out-of-state staff members who can log-in remotely. Some workplaces are made up entirely of staff logging in from a coffee shop six states away.

These advancements can lead to some tax-related hiccups. Eddie Adkins, partner at Grant Thornton’s national tax office in Washington, D.C., and Tom LeClair, manager at Grant Thornton’s human capital services practice in Chicago, Ill., sought to sort some of those potential issues out during their session “Tax Issues for the Modern, Mobile Workforce” at the recent American Institute of Certified Public Accountants (AICPA) Not-For-Profit Industry Conference.

    Among the topics discussed was determining withholding and reporting requirements for multi-state employees. Guidance provided for such situations included:

  • Identify the employee’s lived-in state. This should be fairly self-explanatory;
  • Identify the worked-in state. Note that this might include multiple states;
  • Research reciprocal agreements. A reciprocal agreement might exist between two or more states to exempt the wages and income of residents of neighboring states from the income taxes of worked-in states. In such situations, employer withholding and employee income tax requirements would apply to the state where the employee lives. If an agreement exists, identify restrictions, ask the employee to submit a nonresident certification form, and retain nonresident certification for your organization’s files;
  • If there is no such agreement between the worked-in and lived-in states, note the worked-in state’s withholding requirements and follow accordingly. These requirements vary from state to state with jurisdictions such as California basing withholding on the allocation of days the employee works within a state as compared to outside a state. Colorado, on the other hand, imposes an employer withholding obligation the first day a non-resident employee performs a service in the state; and,
  • Follow suit with lived-in state withholdings and reporting requirements. Employees are subject to personal income tax in the lived-in state even when the employer withholds worked-in state income tax. Generally, employees receive a credit for income taxes paid to other states. Additional considerations include reporting requirements such as W-2 wage reporting obligations and situations in which the lived-in state rate of withholdings exceeds the worked-in state or when the worked-in state does not impose a personal income tax but the lived-in state does.