Understanding Multi-State Taxation

Companies face many complex business challenges, especially during important turning points, such as merger or general growth. Becoming a multi state employer is one such challenge. The intricacies surrounding multi state business ownership have serious tax implications.

Four specific tax considerations should be contemplated before engaging in multi state business: employer withholding, sales tax, property tax, and income tax. Each category envelopes a collection of questions that must be answered, with careful research or via the professional guidance of a CPA. In the content below, we explore each tax consideration. First, we provide a general overview of multi state employment income tax implications, then we ask a variety of crucial questions.

Multi State Employment: General Income Tax Information

As business owners considering multi -state business understand, pursuing operations in more than one state can result in withheld income tax in multiple states. Tax withholding grows complex when employees live and work in different states. In such multi faceted situations, employers often wonder which state’s income tax should be applied. The American Payroll Association writes:

The default rule of state income tax withholding that can be used as a starting point is to withhold income tax for the state in which services are performed if the employee lives and works in one state (assuming it is not one of the nine states that do not have a state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming). A resident is subject to the laws of the state of residence, including its income tax laws, so the first determination an employer must make is an employee’s state of residency. States have varying definitions of residency.

Reciprocal agreements between states of residency and states of employment ease the complexity of income tax for employers. If this is not the case, employers must consider the individual laws of every state, both of residency and employment. Because individual states have differing requirements, the process of determining accurate income tax is intricate.

The process grows complicated with traveling employees. Legislation poised to simplify state income tax is in consideration, especially regarding the traveling complexities. The Mobile Workforce State Income Tax Simplification Act of 2019 suggests that a 30-threshhold must be met before a state can enforce income tax. The act claims to end inconsistent taxation among multi state employees, reduce the complex burden employers possess during periods of out-of-state assignments, ensure equal and fair treatment of employees, and promote greater compliance due to simplicity.

Employers considering multi state growth should understand potential legislation, the complexities of tax considerations. Employers should also understand the biggest questions raised regarding employer withholding, sales tax, property tax, and income tax. In the following content, we present a list of valuable questions that should be considered when becoming a multi state employer.

Multi State Employer Withholding

Employee income withholding will be affected when becoming a multi state employer. Consider the following questions.

• Will you have employee’s or subcontractors working and/or living in this state?
• What will the employee/subcontractor be doing in that state?
• Is the Company already registered for employer withholding?
• Will unemployment insurance be required?
• Will workers’ compensation insurance be required?
• Will local withholding registration be required?
• Is a Secretary of State ID number required (could require an additional registration, as well as the need for a registered agent in the state)?

Sales Tax

Sales tax varies, particular to a governing body. Determining the proper sales tax to adhere to can be aided by these specific questions:

• What type of work will you be providing to this state?
• Will you be generating sales or shipping products to this state?
• Are your services exempt in this state? If so, you may need to request exemption certificates from your customers in that state.
• Will you be making any exempt purchases in this state? Is so, an exemption certification may need to be provided to your vendor’s in this state.

Property Tax

Property tax must be considered if property will be leased or acquired in the various states receiving your goods, services, or business activity.

• Will you lease or own property located in this state (office building, warehouse, computer, laptop, equipment, etc.)?

Income Tax

As discussed above, income tax is complex when becoming a multi state employer – a crucial component to consider. The following questions offer guidance into determining proper income tax for specific individuals or entities.

• What activities will be done in the state? Verify whether the Company has nexus in the state.
• Will you be generating sales or shipping products to this state?
• Does the state have an income tax filing? May require a separate multi state employer registration.
• Does the state have a franchise tax filing? May require a separate registration.
• Does the state have any other type of gross receipts filing? May require a separate registration.
• Does the state have an LLC tax filing?
• Are there any unclaimed funds filing requirements?
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Flynn & Company: CPA and Business Consultants

At Flynn & Company, we understand that growth is exciting. At times, growth results in the opportunity for multi state employment. Though a good opportunity, the tax considerations in such a venture are complicated. However, when performed correctly, they are not a deterrent.

As Business Consultants and CPAs, we bring a wealth of experience navigating complex business challenges – from financial assistance and succession planning to business valuation and multi state employment guidance. Before making an impactful financial decision, every tax implication must be considered. We are poised to guide businesses through successful decisions, transitions, and growth.

We create innovative and practical solutions to help our clients achieve greater bottom line profits.

Small enough to provide personalized service – helping businesses and families succeed. We are ready to help! Contact us today at (513) 530-9200 or via our online form to begin a conversation.