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21 st Annual IL Statewide APA Conference Thursday, August 21, 2014 4:05 – 5:35.

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Presentation on theme: "21 st Annual IL Statewide APA Conference Thursday, August 21, 2014 4:05 – 5:35."— Presentation transcript:

1 21 st Annual IL Statewide APA Conference Thursday, August 21, :05 – 5:35

2 Boiling Over the Updates for Multi-State Taxation Vicki M. Lambert, CPP The Payroll Advisor 21st Annual IL Statewide APA Conference – August 21-22, 2014

3 About the Speaker ©2014 The Payroll Advisor3 Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor, a firm specializing in payroll education and training. For more information about the firm go to As an adjunct faculty member at Brandman University, Ms. Lambert is the creator and instructor for the Practical Payroll Online payroll training program, which is approved by the APA for recertification credits.

4 What Is Our Focus For Today? ©2014 The Payroll Advisor 4  List of all taxes required by states  Income  SUI  SDI  Local  Following the IRS Code—where the states stand  Supplemental Taxation  Determining State Withholding Liability  Resident Qualifications

5 What Is Our Focus For Today? ©2014 The Payroll Advisor 5  Reciprocal Agreements  Resident vs. Nonresident  Withholding Allowance Certificates  4 Factor Test for SUI  Handling SIT & SUI for Multistate employees

6 State Income Tax ©2014 The Payroll Advisor 6  Most employers are required to withhold state income tax from employee’s wages  Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington & Wyoming have no state income tax  Tennessee does not require income tax withholding

7 State Unemployment Insurance ©2014 The Payroll Advisor 7  State Unemployment laws are largely dictated by the Federal Unemployment Tax Act requirements  States do vary in their tax structure  States vary on taxable wage bases  Employer rates vary not only by state but by industry  Some states have employee tax

8 MT WY ID WA OR NV UT CA AZ ND SD NE CO NM TX OK KS AR LA MO IA MN WI IL IN KY TN MS AL GA FL SC NC VA WV OH MI NY PA MD DE NJ CT RI MA ME VT NH AK HI Has local taxation States with Local Tax Requirements

9 State Disability Insurance ©2014 The Payroll Advisor 9  State program to provide income when an employee is unable to work due to illness or injury  5 states have mandatory SDI programs  California, Hawaii, New Jersey, New York and Rhode Island (also Puerto Rico)  Can be state plan or insurance plan

10 Types of Disability Programs ©2014 The Payroll Advisor 10  California-State Plan  Also allows self insured plans  Employee funded—Percentage of taxable wage base  Also has paid family leave included  Hawaii  State plan for unemployed workers or whose employers have gone bankrupt  Private or self insurance plan otherwise  Hawaii has workers paying ½ the cost up to 0.5% of employee’s weekly wages

11 Types of Programs ©2014 The Payroll Advisor 11  New Jersey  Private plans permitted if meet requirements  Otherwise state plan  Employer and employee funded  Percentage of taxable wage base  Has Family Leave Insurance   New York  Provided through state insurance fund, private insurance or self-insurance  can deduct up to 60 cents per week for State Fund insurance premiums from employee’s wages  Rhode Island  State plan  Employee funded  Percentage of taxable wage base  Paid Family Leave as of

12 Are You an Employer In NY for TDI? ©2014 The Payroll Advisor 12 An employer who has had in New York State employment one or more employees on each of at least 30 days in any calendar year shall be a "covered employer" subject to the Disability Benefits Law after the expiration of four weeks following the 30th day of such employment (WCL §202). These 30 days of employment need not be consecutive days but must be work days of employment in one calendar year.

13 Local Taxes ©2014 The Payroll Advisor 13  Some are paid by the employee, some the employer and some are levied on both the employee and employer. However, not all are deducted from the employee’s wages but are still owed by the employer. Most are based on the payroll in some way.  May require determination of coverage such as county the employee lives in

14 Could Include ©2014 The Payroll Advisor 14  Employer Expense Tax  Chicago, Illinois-recinded  License Fee  Louisville and/or Jefferson County, Kentucky  Earned Income taxes  Wilmington, Delaware  Pennsylvania’s “Act 32”

15 Could Include ©2014 The Payroll Advisor 15  Income Tax  Maryland Counties and Baltimore City (Pennsylvania residents watch out too!)  Detroit, Michigan  New York, New York  Ohio (can’t list them all—over 500!)  County taxes  Indiana—need I say more!

16 Could Include ©2014 The Payroll Advisor 16  Payroll Tax  Newark, New Jersey  School District taxes  State of Ohio  Occupational Privilege tax  Aurora, Colorado 

17 Could Include… ©2014 The Payroll Advisor 17  Transportation taxes  Tri Metropolitan Transit District, Oregon  Local Services Tax (Emergency and Municipal Services Tax) (Occupational and Privilege Tax)  Pennsylvania Municipalities or school districts  Workers Compensation Tax  Washington State

18 Could Include ©2014 The Payroll Advisor 18  New Jersey-New York Waterfront Payroll Tax  Modified Business Tax for Nevada  Metropolitan Commuter Transportation Mobility Tax (MCTMT)—NY Court Upheld

19 Following the IRS Code ©2014 The Payroll Advisor 19  Majority of the states have adopted a policy that states the withholding requirements are the same as the federal income tax withholding  CA, MS, NJ and NM have their own code  Other states follow a version of the IRC  The question is which version of the IRC

20 States vs. IRC ©2014 The Payroll Advisor20  The states can follow the current version of the IRC  So if IRC changes, state changes automatically  Some states follow the IRC but only as of a certain date. So changes made after that date are not valid in that state. State legislature must update the code while in session.  Areas to watch: health insurance for nondependent children All states match federal but some exceed it—Watch NJ  Domestic partners and health insurance: DOMA ruling changes everything!

21 States vs. IRC ©2014 The Payroll Advisor21  The states can follow the current version of the IRC. These include:  Alabama, Connecticut, Delaware, DC, Illinois, Indiana, Kansas, Louisiana, Maryland, Michigan, Missouri, Montana, New York (with exceptions), North Dakota, Oklahoma, Rhode Island, and Utah  So if IRC changes, state changes automatically

22 Some States Date the IRC (especially true due to recent legislative activities) ©2014 The Payroll Advisor 22 Some states follow the IRC but only as of a certain date. So changes made after that date are not valid in that state. For Example:  January 1, 2014: Georgia  December 31, 2013: North Carolina—New  January 2, 2013: Virginia  January 1, 2013: Idaho and Iowa  December 31, 2013: Hawaii, Oregon, Maine, and South Carolina  January 1, 2012: Arizona

23 Some States Date the IRC (especially true due to recent legislative activities) ©2014 The Payroll Advisor 23  March 7, 2011: Ohio  January 2, 2013: Arkansas  April 5, 2010: Nebraska  Jan 1, 2005: Massachusetts—watch for transit passes!  Jan 1, 1997: Pennsylvania (may have sections with different dates)  Or they pick a specific time frame or date:  Minnesota: April 14, 2014—New  Vermont: Taxable year 2013—New

24 Supplemental Taxation ©2014 The Payroll Advisor24  Supplemental wages are wages paid in addition to the employee’s regular wages. These include bonuses, overtime, accumulated sick leave payouts, severance pay, awards, prizes, retro pay increases and back pay  States will use a certain percentage to tax or require aggregate method 

25 MT WY ID WA OR NV UT CA AZ ND SD NE CO NM TX OK KS AR LA MO IA MN WI IL IN KY TN MS AL GA FL SC NC VA WV OH MI NY PA MD DE NJ CT RI MA ME VT NH AK HI Aggregate method only Multiple percentages for income tax Flat rate percentage No state income tax Multiple percentages for supplemental wages Supplemental Taxation Methods by State

26 Determining State Withholding Liability ©2014 The Payroll Advisor 26  State laws vary somewhat in their definitions of “employer” subject to withholding requirements. Some follow federal definitions while others have their own. Some common definitions include:  Does business within the state  Pays wages for services to one or more persons whose services are rendered in the state  Maintains an office or other place of business within the state  Derives income from, or takes orders within the state

27 Definition of Resident ©2014 The Payroll Advisor 27  Usually set forth in the state’s income tax laws  Generally: someone who maintains a place of abode or live in the state for a certain period of time Oklahoma: A resident is anyone domiciled or who maintains a permanent place of abode in Oklahoma and spends more than a total of seven months of the taxable year in the state. Oklahoma: A resident is anyone domiciled or who maintains a permanent place of abode in Oklahoma and spends more than a total of seven months of the taxable year in the state.

28 Reciprocal Agreements ©2014 The Payroll Advisor 28  A number of states have entered into reciprocal agreements with other states to ensure that employees who work and reside in different states are not subject to multiple withholding or taxation  The agreements specify that employers should withhold income taxes on a nonresident employee’s wages only for the worker’s home state and that such employee’s wages are not subject to the income tax rules of the state where the wages were earned  Watch out for local taxes usually do not apply  There can be “special” agreements as well

29 MT WY ID WA OR NV UT CA AZ ND SD NE CO NM TX OK KS AR LA MO IA MN WI IL IN KY TN MS AL GA FL SC NC VA WV OH MI NY PA MD DE NJ CT RI MA ME VT NH AK HI Has reciprocal Agreements No reciprocal agreements No state income tax Status of Reciprocal Agreements Allows or has special arrangements

30 Reciprocal Agreement Chart ©2014 The Payroll Advisor 30 StateReciprocal Agreements With: StateReciprocal Agreements With: Illinois Iowa, Kentucky, Michigan & Wisconsin New Jersey Pennsylvania Indiana Kentucky, Michigan, Ohio, Pennsylvania & Wisconsin North Dakota Minnesota & Montana Iowa Illinois Ohio Indiana, Kentucky, Michigan, Pennsylvania & West Virginia Kentucky Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia & Wisconsin Pennsylvania Indiana, Maryland, New Jersey, Ohio, Virginia & West Virginia Maryland D.C., Pennsylvania, Virginia & West Virginia Virginia Kentucky, District of Columbia, Maryland, West Virginia and Pennsylvania Michigan Illinois, Indiana, Kentucky, Minnesota, Ohio, & Wisconsin West Virginia Kentucky, Maryland, Ohio, Pennsylvania & Virginia Minnesota Michigan & North Dakota Wisconsin Illinois, Indiana, Kentucky & Michigan Montana North DakotaDistrict of Columbia Maryland and Virginia

31 For Example: ©2014 The Payroll Advisor 31  IL has agreement with WI  Resident of WI works in IL but does not want IL tax taken out— completes Form IL-W-5-NR—NO IL tax is withheld  Employer may but IS NOT required to withhold for WI

32 For Example 2: ©2014 The Payroll Advisor 32  WI has agreement with IL  Resident of IL works in WI but does not want WI tax taken out— completes Form W-220—NO WI tax is withheld  Employer may but IS NOT required to withhold for IL

33 Resident vs. Nonresident ©2014 The Payroll Advisor 33  Resident: generally must have state income tax withheld from all payments not specifically exempted, including wages for services performed outside the state  Nonresident: compensation is subject to withholding only to the extent it is earned within the state  Sometimes states will allow residents to use credit for other state against tax liability  Example: CA and AZ

34 Arizona Example ©2014 The Payroll Advisor 34 An employer must withhold Arizona tax from wages paid for services performed within Arizona regardless of whether the employee is a resident or nonresident of Arizona. However, there are two exceptions to the general mandatory withholding requirements for nonresident employees temporarily performing services for their employer in Arizona. Although a nonresident employee may be exempt from Arizona income tax withholding, the employee may be required to file a nonresident Arizona income tax return if the employee meets the filing requirement.

35 Arizona… ©2014 The Payroll Advisor 35  An employer may not have to withhold Arizona tax from wages paid to a nonresident performing services in Arizona if:  The employee is physically present in Arizona for less than 60 days in a calendar year for the purpose of performing a service that will benefit the employer; AND  The employer is an individual, fiduciary, partnership, corporation or limited liability company having property, payroll and sales in Arizona, or of a related entity having more than 50% direct or indirect common ownership.

36 Arizona… Additionally, an employer may not have to withhold Arizona tax from wages paid to a nonresident performing services in Arizona if the individual would be allowed an income tax credit for taxes paid to his or her state of residence under A.R.S. § This exemption applies to nonresident employees who are residents of, or domiciled in, California, Indiana, Oregon, or Virginia. ©2014 The Payroll Advisor 36

37 Arizona Example that Meets the Criteria for not Withholding AZ SIT Franks and Beans Inc. is based in CA. It is the common parent of Weiner Corporation. Franks and Beans does not have property, payroll and sales in AZ. Weiner does have property, payroll and sales in AZ. Larry, a nonresident of AZ is an employee of Franks and Beans. Larry performs services for Franks and Beans in Arizona for 55 days. ©2014 The Payroll Advisor 37

38 Another Example: Nebraska ©2014 The Payroll Advisor38 Nonresidents whose wages are subject to federal withholding and who work in Nebraska are subject to the same withholding on their entire wages as that used for Nebraska residents.

39 Connecticut Example ©2014 The Payroll Advisor 39 Dec, 2009: Employers are not required to withhold Connecticut income tax from wages/compensation paid to nonresident employees for services performed in Connecticut provided said employees are assigned to a primary work location outside of Connecticut and work in Connecticut 14 or fewer days during a calendar year. --Still report

40 Maine Example ©2014 The Payroll Advisor 40 Compensation for personal services performed in Maine as an employee is Maine-source income subject to taxation if the nonresident taxpayer is present in the state performing personal services for more than 12 days during that tax year and directly earns or derives more than $3,000 in gross income during the year in Maine from all sources.

41 Maine Example ©2014 The Payroll Advisor 41  Performance of the following personal services for 24 days during a calendar year is not counted toward the 12-day threshold:  personal services performed in connection with presenting or receiving employment-related training or education;  personal services performed in connection with a site inspection, review, analysis of management or any other supervision of a facility, affiliate or subsidiary based in Maine by a representative from a company, not headquartered in Maine, that owns that facility or is the parent company of the affiliate or subsidiary;  personal services performed in connection with research and development at a facility based in Maine or in connection with the installation of new or upgraded equipment or systems at that facility; or  personal services performed as part of a project team working on the attraction or implementation of new investment in a facility based in Maine.

42 Employee Withholding Certificates— The States ©2014 The Payroll Advisor 42  Employers must verify if the state has an equivalent form to the IRS Form W-4  The States may:  Not have their own form and use the Form W-4  Have their own form but allow Form W-4 to be used  Require only the state form be used  Best Practice Recommendation: If they have a form it should be used

43 Examples ©2014 The Payroll Advisor 43  Arizona: Form A-4 is required  California: DE4 required if withholding is different from federal withholding  Idaho: No state form

44 MT WY ID WA OR NV UT CA AZ ND SD NE CO NM TX OK KS AR LA MO IA MN WI IL IN KY TN MS AL GA FL SC NC VA WV OH MI NY PA MD DE NJ CT RI MA ME VT NH AK HI Must use state form May use federal Form W-4 No state income tax Form W-4 Equivalents Restrictions on using Fed Form W-4 No state form must use federal Form W-4

45 States That Require/Recommend Use of Their Own Certificate Include… ©2014 The Payroll Advisor45  Alabama: Form A-4  Arizona: Form A-4  Arkansas: Recommends AR-4EC but allows modified Form W-4  California: Requires DE 4 if withholding is different than federal  Connecticut: CT-W-4  District of Columbia: D-4  Georgia: Form G-4  Hawaii: Form HW-4  Illinois: IL-W4  Indiana: WH-4

46 States That Require/Recommend Use of Their Own Certificate Include… ©2014 The Payroll Advisor46  Iowa: Iowa W-4  Kansas K-4  Kentucky: Form K-4  Louisiana: Form L-4 or L4E should be used but accepts (mutually agreed upon) modified Form W-4—employer responsible to determine number of correct allowances  Maine: Form W-4ME  Maryland: Form MW 507  Massachusetts: M-4 required if state exemptions differ from fed  Michigan: MI-W4  Minnesota: W-4MN  Mississippi: Form  Missouri: MO W-4  New Jersey: NJ-W-4 or Form W-4 may be used

47 States That Require/Recommend Use of Their Own Certificate Include… ©2014 The Payroll Advisor47  New York: Accepts W-4 recommends Form IT-2104  North Carolina: Form NC-4 or NC-4EZ  Ohio: Form IT-4  Rhode Island: Form RI W-4  Vermont: Form W-4VT is recommended  Virginia: Form VA-4  West Virginia: WV/IT 104  Wisconsin: WT-4 if state exemptions differ from fed

48 States That Have No Form Include…  Colorado  Delaware: Has Form SD/W4 for calculating only use Fed W-4  “For Delaware Purposes Only”  Idaho  Montana  Nebraska  New Mexico  North Dakota  Oklahoma  Oregon  Pennsylvania  South Carolina  Utah 48 ©2014 The Payroll Advisor

49 Possible Other Forms on State Level ©2014 The Payroll Advisor49  Special forms for employee to claim exempt from state income tax  Special form for military spouse to use to claim exempt from state income tax  Forms for nonresidents of the state  Reciprocal agreement forms

50 Example of Exempt Form-NY ©2014 The Payroll Advisor50  Completes the form if the employee is claiming exempt from state income tax  Also used by Military spouses

51 Example of Nonresident Form-CT ©2014 The Payroll Advisor51  Completes the form if the employee is a nonresident who performs services partly within and partly outside of Connecticut for same employer  Must also complete Form CT-W4

52 One Form Mostly Fits All ©2014 The Payroll Advisor52  Use the same form for most purposes  Example is Georgia  Use the G-4 to claim exempt from withholding if owing no tax and for military spouse exemption

53 States That Use Special Form ©2014 The Payroll Advisor 53 Example: Pennsylvania Local Earned Income Tax Residency Certification Form: DCED-CLGS-06 For more info on tax go to

54 Making the Determination on Taxation ©2014 The Payroll Advisor 54 State Working State Living Rules for this state for a nonresident working here including reciprocal agreements Rules for when a resident from this state works in another state including any reciprocal agreements Based on all we have covered the employer then determines the income tax withholding Best and easiest way is to T-account it

55 Guidelines—Employees Working in 2 or More States ©2014 The Payroll Advisor 55  Still using the rules just discussed as to resident and nonresident etc.  Some states provide guidelines for computing the allocation of withholding liabilities when employees work in more than one state  There are three commonly approved formulas Volume of business ratio Time Basis Mileage Basis

56 Example: Traveling sales person paid by commission Example: Traveling sales person paid by commission Volume of Business Ratio ©2014 The Payroll Advisor 56 Where an employee’s compensation depends directly on the volume of business transacted by that employee tax withholding attaches to that portion of the wages determined by ratio of volume of business transacted within the jurisdiction to the total volume of business transacted by the employee

57 Time Basis Where an employee is paid on a daily, weekly or monthly basis, tax withholding attaches to that portion of the employee’s pay determined by the ratio of working hours within the taxing jurisdiction to the total working time ©2014 The Payroll Advisor 57 Example: Human Resources Manager paid on salary

58 Mileage Basis ©2014 The Payroll Advisor 58 Where an employee is paid on a mileage basis, tax withholding attaches to that portion of the employee’s pay determined by the ratio of actual mileage within the taxing jurisdiction to the employee’s total mileage Example: Delivery driver just passing through

59 Form W-2 Reporting Example: Connecticut ©2014 The Payroll Advisor 59 Gross wages means the sum of wages paid to all your employees regardless of where they work. The amount of gross wages you report on Form CT- 941 for a calendar quarter must correspond with the amount reported on Federal Form 941 for that quarter.

60 Connecticut Example Cont… ©2014 The Payroll Advisor 60 Gross Connecticut wages means the sum of: All wages paid to resident employees. Connecticut wages paid to resident employees are wages paid to resident employees regardless or where their services are performed. The amount of Connecticut wages paid to a resident employee will generally equal the amount of the employee’s wages for federal income tax withholding purpose.

61 NY Example-Nonresident ©2014 The Payroll Advisor 61

62 Four Factor Test for SUI ©2014 The Payroll Advisor 62  The states have adopted uniform rules to help them determine which state has the right to claim coverage of employees who work in two or more states for an employer. Employers consider the following four factors in successive order:  Localization of services  Base of operations  The place of direction or control  Place of residence

63 Localization of Services ©2014 The Payroll Advisor 63  Services performed partly within and without the state will be covered by state law if the work performed outside the state is incidental to the work performed in the state.  Incidental means transitory or temporary or isolated instances or transactions

64 Example ©2014 The Payroll Advisor 64 Localization of Services: A payroll clerk normally works at the company’s headquarters in Georgia. Due to the acquisition of a firm in Alabama the payroll clerk is sent to that state for three months to change over the payroll system. Georgia retains jurisdiction even during the period the payroll clerk is working in Alabama.

65 Base of Operations ©2014 The Payroll Advisor 65  If a worker normally or regularly works in two or more states the employee’s services can’t be said to be localized in one state. The next best claim to jurisdiction is the state where the employee performs some services and in which the base of operations is located  Base of operations means the place where employees report for work or customarily return to

66 Example ©2014 The Payroll Advisor 66 Base of Operations: A New York based company employs a regional sales manager to cover the states of PA, NJ and MD. The sales manager works out of an office in PA and divides his time fairly evenly among the three states. His activities are directed and controlled from the New York office. Pennsylvania has jurisdiction since the sales manager’s services aren’t localized in any one state and the base of operations is in PA.

67 Place of Direction or Control ©2014 The Payroll Advisor 67  If the prior two tests aren’t applicable then the employer goes to the next best claim of jurisdiction which is the state in which the employee performs some services and which is the place of direction or control  The determinant is the place of immediate or potential control even if the control is exercised only rarely

68 Example ©2014 The Payroll Advisor 68 Place of direction or control: A salesperson covers the DC metropolitan area including parts of DC, VA and MD. The salesperson has no primary base of operations and is under standing orders to call in at least daily to the company headquartered in DC. DC has jurisdiction in this instance since services aren’t localized, no primary base of operations and the salesperson receives direction and control from the DC office

69 Place of Residence ©2014 The Payroll Advisor 69 If the prior three tests don’t establish jurisdiction the state of jurisdiction becomes the one in which the employee both performs some services and maintains a place of residence

70 Example ©2014 The Payroll Advisor 70 Place of Residency: An equipment manufacturer in Detroit has an employee who supervises equipment installations and handles complaints from customers in IN and OH. The employee has no particular place of operations but lives in Ohio. The state of jurisdiction is Ohio.

71 Reciprocal Coverage Agreements ©2014 The Payroll Advisor 71  Most states subscribe to the Interstate Reciprocal Coverage Arrangement  Permits employers to cover services in a single state by election of the employer  All services will be covered in any state either in which any part of the services are performed, the employee resides or where the employer maintains a place of business  States accept and pay contributions on each other’s behalf to assure that services provided by multistate employees are not covered under more than one state

72 Example ©2014 The Payroll Advisor 72 A construction engineer who works for a Texas firm on a job in New Mexico for four months and who then goes to CA for six months on a job might be covered under both New Mexico and California laws. Under the interstate reciprocal arrangement, the Texas firm could elect to cover all the services performed by the engineer under Texas law

73 Fringe Benefits ©2014 The Payroll Advisor 73  Nothing changes in paying fringe benefits in terms of taxation  Common mistake – taxing where the employee lives regardless of where money is earned  It is the same as paying wages—State where “fringe benefit” is earned determines taxation  Good example is domestic partnership health insurance—DOMA ruling changes everything

74 Useful Links ©2014 The Payroll Advisor 74  payroll-taxes.com: lists each state for withholding, local taxes, reciprocal agreements, SUI and SDI

75 What We Covered Today… ©2014 The Payroll Advisor 75  List of all taxes required by states  Income  SUI  SDI  Local  Following the IRS Code—where the states stand  Supplemental Taxation  Determining State Withholding Liability  Resident Qualifications

76 What We Covered Today… ©2014 The Payroll Advisor 76  Reciprocal Agreements  Resident vs. Nonresident  Withholding Allowance Certificates  4 Factor Test for SUI  Handling SIT & SUI for Multistate employees

77 Are There Any Questions? ©2014 The Payroll Advisor77

78 Thank You for Attending! 21st Annual IL Statewide APA Conference – August 21-22, 2014


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