Normally, payroll and taxes shouldn’t be a problem when you own a small business. However, if you have employees who either live in one state and work in another, or your business has multiple locations with employees working and residing in two or more states, things can get complicated pretty fast if you don’t know the proper procedure involved.
Factors to Consider
When it comes to determining in which state you have to pay income taxes for your employees, there are a few important factors to consider to find out where annual taxes or the taxes required for a specific pay period will need to be filed:
- If all or most of an employee’s services are performed in a single state, with only a few activities linked to other states, then the employee will be subject to that state’s payroll tax laws.
- If that rule cannot be applied, a base of operations can be established, linked to all employee activities associated with that area.
- In case no base of operations for the employee can be determined, the location where the employer “exercises basic and general direction and control” will be considered as being the area where payroll taxes for the employee apply if the employee’s services are also performed in that specific state.
- Finally, in case none of these factors can be applied, the employee’s stable residence will be considered as the main determining criteria for the state in which payroll taxes will need to be paid.
One of the worst things an employer can do is nothing, potentially leaving an employee open to double-taxation. Whenever there is a cross-border situation, the employer should look at both the states involved and their policies, to make sure the amounts withheld are for the correct state, and in the correct amount.
Be advised that the rules required for payroll and income taxes may differ from state to state, and some states also have various coverage agreements that allow employers to request written approvals for reporting salaries paid to multi-state employees.
To find out which category the states your business operates in fall under, you may have to do some additional research. We’d be happy to help you sort out the complexities of your particular situation.