Multi-State Tax Withholding

Our tax engine tracks withholding rules on a state-by-state basis to accurately compute
state income tax withholding when an employee lives and works in different states.

To compute multi-state withholding, the tax wizard begins by identifying the resident state of the employee. Please note that the tax wizard expects only one state to be set as a resident state.

The tax wizard then loops through all the nonresident work states to determine the following:

• Are taxes withheld in the work state?
• Should the resident state also withhold on the wages earned in the work state?
  • If so, then should that resident state withholding amount be modified based on the amount withheld in the work state?

Resident state" vs. "work state"

"resident state" is used to refer to the state where the employee resides, regardless of if wages are also earned there or not. "Work state" is used to refer to any state where wages are earned, other than the resident state.

Several important factors are already tracked by the tax wizard:

• Does the state have a tax?
• Does the state withhold on nonresidents (i.e., employees that work in the state but that live outside the state)?
• Does the state withhold on wages that were earned out-of-state?
  How does the resident state calculate tax on the wages earned out-of-state?
• Does the state have a reciprocal agreement in place with other state

Multi-state table of variables

The following table shows the multi-state values used by our tax engine. The column numbers are also referenced in the flowchart for your convenience.

1. State/territory: The two-letter identifier for the state or U.S. territory
2. Has state tax: Does this state/territory withhold a state income tax (SIT)?
3. Withholds on nonresidents: Does this state withhold SIT for employees that work in the state, but that live outside the state?
4. Withholds on out-of-state wages: When this is the resident state, is there withholding on wages earned in any other state?
5. Withholds if no withholding in work state: When this is the resident state, is there withholding on wages earned in work states that do not require withholding (either due to the work state not withholding on nonresidents, or not having a state tax at all)?
6. Calculation type: When this is the resident state and no reciprocal agreement is being applied, how will the tax be calculated?
7. Reciprocal states: What states have reciprocal agreements with this state?