If there is one thing every business owner needs to calculate correctly, it’s taxes.
The consequences of filing incorrectly can be damaging to your business. Can you afford fines and penalties?
The process of taxation gets more complicated when you operate in multiple states.
If you have an employee who works at various business locations across state lines, which state taxes do they pay? What if they live in one state and commute to work at your business in another?
The rules are complex, weaving a web of payroll tax liability that can seem impossible to untangle.
But don’t worry - the nuances of payroll compliance for multi-state employers are not as scary as they may sound upfront.
Below we will cover two critical pieces to the multi-state taxation puzzle that you need to know before tax season rolls around.
Things You Need to Know About Multi-State Taxation for 2023
To simplify a complex subject, multi-state taxation refers to the taxation of income or property that crosses state lines.
From a business standpoint:
- State law requires companies operating across state lines to register, collect, and remit sales taxes to the state they are operating in.
- Companies operating in multiple states may have to file tax returns and pay taxes in each state.
From an employee standpoint:
- The worker may need to file a tax return in both states if he or she lives in one state but works in another.
When it comes to multi-state taxation, you need to plan ahead if you have employees, clients, or locations across state lines. But what should you keep in mind when filing your 2023 taxes?
At ConnectPay, we know that figuring out your business taxes can be overwhelming and confusing.
If you are interested in learning more about how we can pair you with a tax professional who is an expert in the local taxes of your states of operation, request a meeting today!
1. Reciprocal Agreements
2. What About Nexus?
3. Audit Concerns
4. Managing a Mobile Workforce
Now, let’s dive into some of the specifics!
Reciprocal Agreements
Reciprocal agreements are perhaps the most important thing to understand when it comes to multi-state taxes.
A reciprocal agreement is an agreement between two or more states regarding income earned by nonresidents of the state. An employee who works in one state and lives in another will only pay income taxes in the state where they live under these types of agreements.
Be sure to familiarize yourself with the list of states with reciprocal agreements.
When Multiple States Don’t Have a Reciprocal Agreement
If the two states in your multi-state circumstance do not have such an agreement, you may need to withhold state income tax for both states.
As an example, if your employee lives in a state without income tax (such as Florida) and works in a state with income tax (such as California), and the two states do not have reciprocal agreement, your employee will have to file an income tax return and pay taxes in both states.
As a result, your employee may pay more taxes than if they lived and worked in the same state.
What About Nexus?
In sales tax law, nexus refers to the connection or link that businesses have with a particular state, which establishes their legal obligation to collect and remit sales tax there.
Tax withholding requirements vary from state to state, but essentially, if you have a physical presence in a specific state (a retail store, warehouse, or office), you may have to withhold state and local taxes.
Before taxing authorities can impose a tax, a nexus must exist.
The expansion of internet sales has further complicated things, as states have begun requiring out-of-state online retailers to collect sales taxes for sales made to in-state customers.
Audit Concerns
If you’re like most business owners, when you see the words “tax” and “audit” in the same paragraph, you probably start to sweat a little bit.
But with proper preparation and understanding of tax regulations, the word “audit” doesn’t have to send you into a tizzy.
Do any of the following circumstances apply to your business?
- Salespeople in other states
- Remote employees living and working in other states
- Training or business conducted in other states
If so, you must be aware of possible issues regarding multi-state taxes.
To prepare for a potential audit regarding your multi-state taxes, you should gather information about your sales volume in other states.
You should also work with a tax expert to appropriately assess your audit risk level. ConnectPay can pair you with an expert familiar with the tax laws in any states of your choosing.
Managing a Mobile Workforce
Managing multi-state taxation is similar to navigating a minefield. Where do you step? Can you cross that line? What happens if you do? Here are some tips for managing a mobile workforce using the information above.
- Understand the Nexus rules: Get familiar with the nexus rules in the states where you have employees. You will then know if you need to collect and remit sales tax, and if you need to file income taxes for non-residents.
- Track employee location: Determine where taxes need to be collected and remitted by tracking your mobile workers' locations. Timekeeping software can help you do this.
- Keep accurate records: Store accurate records of employee income, including the state in which the income is earned and the amount of state taxes paid. The information will be used to determine tax liability and to file returns.
- Review Reciprocal agreements: Reciprocal agreements can help you avoid double taxation, so review reciprocity agreements between states where you have employees to determine if you can benefit.
- Keep track of tax rates and regulations: Tax rates and regulations can change frequently. Stay up-to-date on the laws and regulations of each state where you have employees.
- Outsource to a payroll provider: A payroll provider can handle everything in points one to five. Let somebody else do the hard work so you can focus on your business.
Managing Your Multi-State Taxation in 2023
Correctly managing your multi-state taxation is essential to conducting your multi-state business.
Even armed with this information, it would benefit you and your business to bring in experts who can answer all your questions about multi-state taxation for 2023.
At ConnectPay, we guarantee that our customer service team will be available to take your call at all times during business hours. No voicemail, no phone tag.
Get connected with a payroll representative today to learn more about how ConnectPay can help you with your tax questions and concerns.
