Employer State Income Tax Withholding with Today's Mobile Workforce

Employer State Income Tax Withholding with Today's Mobile Workforce

Even in the day of teleconferences and electronic interaction, face-to-face communication with business contacts is inevitable. This in-person touch often requires employees to venture outside their home state, thereby earning a portion of their salary/wages in the state where they are present. For example, sending a sales rep to visit an out-of-state customer, or a technician to repair a defective product in another state, or executives to investigate a new partnership could all result in your employees earning income outside their home state. Yet, many employers fail to understand their obligation to withhold the other state's income tax from the employee's income earned outside their home state. Additionally, traveling employees may raise municipal income tax withholding obligations, even if merely traveling to different cities within the employee's home state.

Generally, an employee will earn out-of-state income from working even one day in another state and this may trigger an obligation for the employer to withhold that state's income tax. However, there are two safe harbors that employers must be aware of. First, several states have entered into reciprocal agreements exempting employers in neighboring states from withholding taxes of its employees earning income in the neighboring state. For instance, Ohio has entered into reciprocal agreements with its five border states - Indiana, Kentucky, Michigan, Pennsylvania and West Virginia. These agreements provide that Ohio businesses sending employees into the border state are not required to withhold the other state's income tax on the compensation paid therefor, and vice versa. See Ohio Department of Taxation, FAQs - Employer Withholding. (Click here to view Ohio's Reciprocal Agreements). However, this does not protect an Ohio business that sends an employee into a non-border state.

Second, several states have a low income tax credit which effectively allows an individual to earn up to a certain amount of income in the state without incurring an income tax liability....

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View Steve Dimengo and Richard Fry's insights in their entirety on the Ohio State Tax Blog site.

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RELATED LINKS: For additional information about state personal income tax credits, see:

Bender's State Taxation: Principles & Practice is also avaiable in print at the LexisNexis® Store.

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