Setting up multi-state employees - examples

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This topic explains how the application handle different multi-state income tax situations and how the default calculations can be modified.

Definitions

State unemployment insurance: By default, the application calculates state unemployment insurance (SUI) based on the location in which the work was actually performed by the employee. Note, however, that if you clear the Do not combine state unemployment checkbox in the Payroll Taxes tab of the Setup > Clients screen for a client, then the application calculates employee- and employer-paid state unemployment and insurance for the state associated with the employee's primary location based on wages earned in any state. 

State withholding: The application, by default, uses the work location to determine the appropriate jurisdiction to use to calculate state withholding amounts. However, it can handle extensive multi-state calculations based on an employee's residency, the location that the work is performed, existing reciprocal agreements between states, the nexus relationships of the client (employer), other individual state requirements, and whether or not a certificate of non-residency has been filed by the employee. In addition, the application provides you with options to override the default calculations, and these options are explained in the sections below.

A reciprocal agreement between states is an agreement that a state will not require income tax withholding from the other state's residents who perform work in the taxing state. For example, a reciprocal agreement allows a resident of state A to work in state B without being subject to state B's withholding tax, ensuring that employees are not subject to tax withholding by both states.
If a client has nexus in a jurisdiction, it means that they have a business connection or a presence in that jurisdiction and are therefore subject to applicable state or local income and sales taxes.

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Setup examples (using automatic multi-state calculations)

The following examples use the application's default multi-state calculations, which are appropriate in most cases.

Example icon Same client location and employee residence

  1. Set up an Ann Arbor, MI work location for the client in the Main tab of the Clients screen, if it doesn't yet exist, and mark the Taxing address checkbox.
  2. Add the employee's information, including the address of their primary residence. Make sure that the Resident address checkbox is marked for that address.
  3. If the client has more than one work location, make sure that the employee has the correct Ann Arbor location and department marked as the primary work location in the Locations and Departments grid in the Main tab.

Result: When you process payroll checks for the employee, the application uses Michigan as the jurisdiction when calculating both the Unemployment Insurance and the state withholding amounts for this employee.

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Example icon Different work location and employee residence (with reciprocal state agreement)

  1. Set up an Ann Arbor, MI work location address for the client in the Main tab of the Clients screen, if it doesn't yet exist, and make sure that the Taxing address checkbox is marked for that address.
  2. Add the employee's information, including their Toledo, Ohio, street address. Make sure that the Resident address checkbox is marked for that address.
  3. If the client has more than one work location, make sure that the employee has the correct Ann Arbor location and department marked as the primary work location in the Locations and Departments grid in the Main tab of the Employees screen.
  4. After the employee has provided the client with a Michigan Certificate of Nonresidency, mark the Nonresident exemption certificate checkbox for the employee in the Payroll Taxes tab of the Employees screen.
  5. In the Payroll tab of the Clients screen, select OH from the State drop-down list, enter the Withholding ID, and then mark the Client has nexus in this state checkbox.

Result: When you process payroll checks for this employee, the application uses Michigan as the jurisdiction when calculating Unemployment Insurance and only Ohio as the jurisdiction when calculating state withholding amounts, because of the reciprocal agreement between Michigan and Ohio.

Do not mark the Wage Exempt checkbox for the Michigan state withholding items in the Taxes grid in an attempt to make the application calculate Ohio withholding instead of Michigan withholding. The application automatically calculates the appropriate taxes.

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Example icon Different work location and employee residence (no reciprocal state agreement)

  1. Set up a San Diego, CA work location address for the client in the Main tab of the Clients screen, and make sure that the Taxing address checkbox is marked for that address.
  2. Add the employee's information, including both addresses. Make sure that the Resident address checkbox is marked for the primary residence address in Ann Arbor, MI, and that the Mailing address checkbox is marked for the San Diego, CA address.
  3. If the client has more than one work location, make sure that the employee has the correct San Diego location and department marked as the primary work location in the Locations and Departments grid in the Main tab.
  4. When you have finished setting up the employee record, return to the Setup > Clients screen and, in the Payroll Taxes tab, select MI in the state drop-down list, mark the Client has nexus in this state checkbox, and Enter the Withholding ID for Michigan.

Result: When you process payroll checks for this employee, the application uses California as the jurisdiction when calculating Unemployment Insurance and calculates state withholding amounts for both California and Michigan, because there is no reciprocal agreement between California and Michigan.

Do not mark the Wage Exempt checkbox for the California state withholding items in the Taxes grid in an attempt to make the application calculate California withholding instead of Michigan withholding. The application automatically calculates the appropriate taxes.

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Calculation options

The application's default multi-state withholding calculations are appropriate in most cases, but you can override them if necessary. In the Taxes section of the Payroll Taxes tab of the Employees screen, you can make the following selections from the Multi-state withholding drop-down list.

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Calculation example (using alternate multi-state calculations)

This example explains how each of the alternate calculation options affects the SIT calculations for an employee.

Note: The tax amounts shown below are for illustrative purposes only and may not reflect current tax tables.

An employee works in Fairfax, Virginia, and is a resident of Chicago, Illinois. The employee's gross pay is $1,000.00.

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Internal notes


See the Multi-state withholding algorithm.

The following workaround is only to be used in cases of dire need (i.e. customers that INSIST on it).  They should know that this is not an ideal solution to the issue. Development is adamant that ACS is handling this correctly, and differently than it was handled by CSA. 

The issue and example: Some reciprocal agreements between states can result in no taxes being withheld for the employee. Example would be an employee in Indiana, working in Ohio, with a non-residency cert on file and no nexus for the company in Indiana. ACS takes all those variable into account and not calculate the state and/or local taxes for either state. However, as those wages are not taxed, they do not flow to taxable wages on reports or to the W2. This can be a problem for users whose employees still need the wages reported, especially on the W2, so that wage amounts are in boxes 16 and 18 when the employee files state/county income tax returns . Essentially, the agreement does not make the employees wage exempt from taxes (based on our and the users understanding) it just makes the company exempt from withholding them.

The workaround for this example: In the Payroll Taxes tab of the Setup > Clients screen, you would need to mark Indiana as client having Nexus.
Next, go to the Payroll Taxes tab of the Setup > Employees screen and choose Indiana under state withholding. 
Then, where it says additional amount, you would change that to fixed amount, leaving the amount as zero.
Because there is no way to set the local withholding to fixed amount zero, the user came up with adding a larger number of dependents, in this case, 1000. That wiped the county taxes.

Result for this example: The state/local taxes appear on the check, but with zero value. ACS still sees the wage as taxable, and they flow to the reports and W-2s. 

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