Multi-State Workers Add Complexity to the Payroll Process

February 4, 2015|Kelly Heimerman

With the start of a new year upon us, it is important to evaluate any new, or perhaps existing, business operations from a multi-state nexus standpoint. An area that can commonly be overlooked regarding multi-state nexus is that of payroll withholding requirements.

Nexus is simply defined as a “connection.” Having a business presence in a state establishes nexus. There are three basic rules that determine payroll withholding requirements: the state of residency of the employee, reciprocity agreements among the various states and resident/nonresident taxation policies.

Each state defines who a resident is for income tax withholding purposes. Most states have a two-pronged definition of residency based either on being domiciled in the state or spending more than a certain number of days in the state.

If an employee performs services in a state other than their state of residency, the next step is to determine if the states have a reciprocal agreement. A reciprocal agreement is designed to make things administratively easier for the employee and employer. In this case, the employee only files one state personal income tax return and the employer withholds only for the state in which the employee lives. Currently, Wisconsin has reciprocity agreements with Illinois, Indiana, Kentucky and Michigan. The reciprocity agreement with Minnesota terminated effective 1/1/2010.

If you determine an employee is a resident of one state but performing services in another state with which there is no reciprocal agreement, then you must look to the withholding laws of each state. The amount of wages earned in each state must be calculated to effectively assess the various state withholdings policies on a state by state basis.

Another determination that must be made when employees are working in multiple states is which state’s unemployment insurance program they fall under. There are four factors you will need to consider:

  1. Are services localized
  2. Does the employee have a base of operations
  3. Is there a place of direction or control
  4. What is the employee’s state of residence

In addition to payroll and unemployment insurance considerations, having a business presence in multiple states can create income tax and sales and use tax nexus too.

If you have employees performing services in multiple states or are adding additional employees in a state other than Wisconsin, please contact us so we can assist you with the research and registration process.

Kelly Heimerman has more than ten years of payroll processing experience. She also has an extensive background assisting clients with all aspects of QuickBooks, including setup, training and troubleshooting. 

Tags: Payroll