Income taxes for multi-state employees
Navigate the complexities of multi-state income taxes for employees and ensure compliance.
Overview
Multi-state income tax is one of the most complicated payroll topics there is. This document will explain both the general rules around it, and how to set it up in Check.
In general, if an employee is a resident of a state, they owe income taxes in that state on all of their wages, and if they are a nonresident of a state, they owe income taxes on just the wages they earned in that state.
To avoid double-taxation, states will offer residents credits for taxes paid to other states in which they worked. This is not really something we care about for payroll calculation, but becomes relevant for the employee when they file their individual returns. Fun fact: this goes all the way back to Commerce Clause of the Constitution, which prohibits state taxation that discriminates against interstate commerce, and was recently the topic of this 2015 Supreme Court case.
In order understand how multi-state taxation works in Check, there are three (3) factors to determine, which we will explain in detail in this document:
- Whether the employer has nexus in the resident state
- How multi-state income taxes and credits are calculated
- Whether the employee opts into reciprocity
Whether the employer has nexus in the resident state
The first important concept to understand is: an employer is only required to withhold an income tax when they have “nexus” in that state.
What is “nexus”? Nexus is a term that simply means that the employer has a “business presence” or is operating in that state, and is therefore subject to the laws of that state. If a company has an employee who lives in a state in which they do not have nexus, that company is technically not required to withhold that employee’s resident state’s income tax. Doing so is considered a courtesy withholding, and is not done by default in Check.
In Check, nexus is determined by the states in which the company has an active workplace. Hence, another way to understand this requirement is: in order to withhold an income tax in a state in Check, the company must have an active workplace in that state.
This means that one way to “enable courtesy withholding” for an employee’s residence state is to simply create a workplace in that state. That said, having nexus in a state is not the only requirement to have income taxes withheld in that state, as we’ll see below.
How multi-state income taxes and credits are calculated
The second concept to understand is that each individual state imposes its own rules about how taxes for its residents working in other states should have their income taxes withheld.
- Some states — like Oregon, California, and Connecticut — always require employers to withhold resident employee’s income taxes on all of their wages earned out of state.
- Other states — like Colorado, North Carolina, and Ohio — only require employers to withhold on wages earned out of state, if that work state does not have an income tax.
- For example, Colorado states: “In general, an employer must withhold Colorado income tax from all wages paid to any employee who is a Colorado resident, regardless of whether the employee performed services inside or outside of Colorado, or both. However, Colorado withholding is not required for wages paid to a Colorado resident for services performed in another state that imposes income tax withholding requirements on such wages.” (Source)
- And finally, some states (currently, only Idaho, Arizona, and Montana) do not require withholding on wages earned out of state no matter what.
These rules are built into Check’s payroll calculation engine. And they mean that even if a company has a workplace in an employee’s resident state, they still may not withhold income taxes for that employee on the wages they earn out of state, because they may not be required to according to the state’s rules.
Overriding multi-state calculation
If you wish to override this behavior, Check supports a company-defined attribute called withhold_resident_state_tax_only, which is available for any employees who live and work in more than one state. This parameter causes all wages that an employee earns to have income taxes in the employee’s resident state (and the work state(s) have no income taxes withheld).
This option may be used if, for example, an employee is only working a small number of hours in other states, and does not meet the de minimis threshold for withholding to be required for nonresidents in the work state. It is the employer’s responsibility to understand these rules and elect to use this parameter in a compliant way.
Whether the employee opts into reciprocity
Finally is the concept of reciprocity.
Reciprocity means that two states have a reciprocal agreement with each other, which allows resident employees of one state to elect to have taxes withheld only for their home state, and not their work state. Currently, there are only 16 states (plus D.C.) that recognize reciprocity.
State | Reciprocal States |
California | Arizona* |
District of Columbia | Maryland, Virginia |
Illinois | Iowa, Kentucky, Michigan, Wisconsin |
Indiana | Arizona*, Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin |
Iowa | Illinois |
Kentucky | Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin |
Maryland | District of Columbia, Pennsylvania, Virginia, West Virginia |
Michigan | Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin |
Minnesota | Michigan, North Dakota |
Montana | North Dakota |
New Jersey | Pennsylvania |
North Dakota | Minnesota, Montana |
Ohio | Indiana, Kentucky, Michigan, Pennsylvania, West Virginia |
Oregon | Arizona* |
Pennsylvania | Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia |
Virginia | Arizona*, District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia |
West Virginia | Kentucky, Maryland, Ohio, Pennsylvania, Virginia |
Wisconsin | Illinois, Indiana, Kentucky, Michigan |
Employees have to “opt-in” to having their taxes withheld in this way. Most states that recognize reciprocity require employees to complete a form, usually a “nonresident certificate”, that signifies to the employer that they have agreed to having taxes withheld only for their home state. In Check, this is indicated by updating the employee’s reciprocity elections, which can be done via API or Console.
Last updated on February 28, 2025