Knowing the structure of taxation in each state is one of the most basic of functions for a payroll professional.

Role of withholding

One of the crucial elements for payroll professionals having to deal with multistate taxation is in having to decide which state’s tax rules apply when faced with these situations: when the employee is a citizen of one state and works in another; when an employee is a resident of one state and works in another, and resides in a state for a period of time and working there in an organization that is not based there. In these situations, a factor that is as important as multistate taxation comes into play –the agreements between the states concerned.

Deductions in tax-free states

Many employees wrongly assume that tax is payable only in the state in which she is employed or where the organization is located. This is not true. Paying taxes in different states is an integral part of multistate taxation. Another area in which there is considerable misconception is regarding tax-free states. It is not enough if an employee just works in a tax-free state; multistate taxation requires that the employee should also live in a tax-free state in order to be exempt from paying taxes in a tax-free state.

Deductions in organizations with businesses in more than one state

Different rules for multistate taxation apply to the respective states for organizations that have operations or businesses in more than one state. The onus of being fully equipped with the rules of such a situation where the organization has to deal with multistate taxation rests with the payroll professional. The payroll professional also needs to know aspects such as:

·         what taxes apply when including locals

·         how to determine liability as an employer

·         how reciprocal agreements can play an important role in determining state withholding

·         the differences between resident and nonresident taxation

·         Form W-4 equivalents and state unemployment insurance and other related areas.

Payroll professionals should also be able to have ready answers to questions such as which state gets the SUI tax and which gets the income tax for a nonresident working in the state; does the state have disability insurance and is it done through an insurance company or through a payroll deduction, and does the state follow the IRS Code for taxing Section 125 plans or not.

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