If you’re located in only one state, you never have to worry about withholding another state’s income taxes or applying another locality’s paid sick leave law, right? Not necessarily. It’s possible that you’ve become an interstate employer without knowing it.
Nexus. You must have a business relationship with a state before you can be required to withhold its income taxes. This relationship, called nexus, certainly arises when you have a physical office in the state. But nexus can be established in other ways, too. And states can set their nexus bar as high or as low as they want, provided they’re reasonable. Here are four easy examples.
- In Virginia, the Tax Commissioner ruled that an out-of-state employer was liable to withhold taxes from its sole employee who worked in the state.
- In New York, the Department of Taxation and Finance concluded that New York employers need not withhold on wages earned by nonresidents whose primary work locations are outside the state and who will be working in the state for no more than 14 days a year. If nonresidents weren’t initially expected to work in the state for more than 14 days, but in fact work more than 14 days in the state, withholding commences with wages paid after the 14th day.
- In Maine, nonresidents who work in the state are subject to withholding if, during a calendar year, they’re in the state for more than 12 days and earn more than $3,000.
- In Connecticut, employers must withhold another state’s income taxes when required to do so by the laws of that state for employees who work or live in that state.
Seattle’s paid sick leave ordinance. Paid sick leave is catching on in states and some municipalities, too. That has tax implications. For example, Connecticut and the District of Columbia have paid leave laws that apply to employers located there. So if you’re a New York employer and you have employees who work in Connecticut, you’re off the hook. But there may be an important exception—Seattle’s Paid Sick and Safe Time ordinance. The ordinance applies to any employee who works more than 240 hours a year in Seattle. Upshot: Out-of-state businesses with reps in Washington must track the amount of time their employees spend in Seattle.
PRACTICE TIP: Familiarize yourself with other states’ laws before you send employees into those states. State tax and labor department websites are a good place to start. What to look for: how employers are defined (e.g., by the number of employees on the payroll generally or specifically in the state); how employees are defined (e.g., by the number of hours they work in the state, where they live, etc.); and any exemptions or exceptions.