Overview: State income taxes withheld from wages are determined by comparing an employee's work state and home state, which is a simple tax allocation process when both states are the same. However, multi-state situations arise when the work state and home state differ, and this can be complicated. In such cases, there are three ways employers can handle withholding taxes: multi-state taxation, reciprocity, and courtesy withholding.
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Multi-State Taxation
Multi-state taxation occurs when both the work and home state require taxes to be withheld from an employee's wages, whether they are a resident or non-resident. In such cases, the employee's wages are subject to taxes in both states.
Taxation depends on the company's business presence in each state (nexus). Employees may need to fill out withholding certificates (state W-4s) for both states, along with state-specific withholding rates, to determine the amount of tax withheld for each set of taxes.
Multi-state taxation is supported by the Buddy Punch platform.
Reciprocity
Reciprocity occurs when an employee's work state and home state have an agreement allowing taxes to be withheld only for the home state. In these cases, employees must "opt-in" to have taxes withheld for their home state.
Most states with reciprocity require employees to complete a nonresident certificate or similar form. Additionally, employers may need to register for a withholding identification number in the home state if they haven't already done so. Currently, only 16 states (plus D.C.) recognize reciprocity including:
Arizona | Kentucky | Montana | Pennsylvania | Wisconsin |
Illinois | Maryland | New Jersey | Virginia |
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Indiana | Michigan | North Dakota | Washington DC |
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Iowa | Minnesota | Ohio | West Virgina |
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Courtesy Withholding
Courtesy withholding is when an employer withholds state income tax for an employee's home state, even when not required, hence the term "courtesy" withholding.
If an employee doesn't work in a state with reciprocity or if their work state doesn't mandate withholding for the home state, they can request this withholding. Employers aren't obligated to do courtesy withholding, and most payroll providers don't support it since it's not mandated by states.
Buddy Punch doesn't currently support courtesy withholding, but may consider it in the future based on demand from partners and employers. If you need this feature, now or in the future, please contact [email protected].
What’s not supported?
The following items are currently unsupported by Buddy Punch:
Missouri employees in multi-state situations (will be supported by the end of Q1 ‘22)
FAQs
Q: What is multi-state taxation, and how does it affect me?
A: Multi-state taxation occurs when you work in one state but live in another or earn income from multiple states. It can impact your tax filing requirements and potentially result in paying taxes to more than one state.
Q: How do I know if my state has reciprocity agreements with other states?
A: You can check with your state's Department of Revenue or Taxation for information on reciprocity agreements. They can provide details on which states have agreements and how they affect your tax obligations.
Q: Do I need to file taxes in both states if there is no reciprocity agreement?
A: If your work state and home state do not have a reciprocity agreement, you may need to file taxes in both states. However, you may be eligible for a tax credit in your home state for taxes paid to the work state.