Is an Employer Required to Withhold State Taxes?

Depending on the exact situation, an employer may or may not be required to withhold state income taxes. If you’re an employee, you could still owe taxes and have to pay on your own.

In-Person Employees

The usual rule is that employers withhold taxes where an employee works. So when employees work at a physical location, it’s relatively straightforward.

Employers will withhold state and local taxes for the state the business is located in.

An employee who commutes from another state may still have to pay taxes in his or her home state. But the employer doesn’t usually have to withhold taxes for that state.

One exception is that neighboring states often have reciprocity agreements to withhold each other’s state income taxes. In that case, an employer may need to withhold income taxes for a commuter employee’s home state.

Examples:

• Employer based in State A, employee lives in State A: Employer withholds State A taxes.
• Employer based in State A, employee lives in State B, no agreement between the states: Employer usually needs to withhold State A taxes but usually doesn’t withhold for State B.
• Employer based in State A, employee lives in State B, reciprocity agreement between the states: Depending on the agreement, the employer will withhold for one or both states. State A may collect state taxes for State B, or the employer may pay State B directly.

To check the rules for your situation, chat with a tax expert online now.

Remote Employees

In the case of remote employees, employers also usually need to withhold taxes based on where the employee works. This is something that has tripped a lot of employers up with more jobs suddenly shifting to remote work.

Also, it’s not just where the employee lives but where the employee is working. For example, if the employer is in State A, the employee lives in State B, but the employee works out of a coworking location in State C, the employer likely needs to withhold State C taxes.

In addition to withholding state and local income taxes, employers will also often need to register for things like unemployment tax where the employee is working.

That’s why many employers limit where fully remote employees can live or work and require approvals before any moves.

Just like in-person employees, an employee may owe state and local taxes to State C for working there and State B for living there. An employee who never works out of the employer’s state will usually not owe taxes to that state.

The good news is that employees don’t have to worry about double taxation for living in one state and working in another. Federal law requires states to give a tax credit for other state taxes, so the most an employee will pay is the higher of the two tax rates.

Temporary Work Locations

If an employee temporarily works in another state, the employer may or may not have to withhold taxes for that state. And the employee may or may not have to pay taxes (the rules aren’t always perfectly lined up).

Most states have a minimum number of days before taxes kick in. So doing a little work on vacation or attending a conference usually won’t trigger taxes for that state.

Longer or repeat work assignments often will.

Since the rules vary by state, both the employer and employee should talk to a tax accountant familiar with the rules for the state where the work is done. Remember, if an employer doesn’t know to withhold taxes or doesn’t have to withhold taxes, the employee could still have to pay taxes.

Paying State and Local Tax as an Employee with No State Withholding

If you’re an employee who’s subject to income taxes in a state your employer doesn’t withhold for (often your home state), there are two steps you need to take:

• File a state income tax return for that state (and maybe a city income tax return for select cities)
• Check if you need to pay estimated taxes

When you don’t have taxes withheld, you still have to pay your taxes throughout the year. That usually comes in the form of four quarterly estimated tax payments.

Estimated tax requirements and deadlines vary by state. The way it usually works is if you’ll owe less than a certain amount to that state (often $500 or $1,000), you don’t have to make estimated tax payments.

If you’ll owe more, you do need to make estimated tax payments. If you wait until you file your tax return and owe too much, you’ll have to pay a penalty for underpaying your estimated taxes.

Warning: Withholding for your federal taxes or for another state usually doesn’t count toward your state estimated tax requirements. So if you got a refund from State A but owed too much to State B, you could still owe a penalty.

Note: You may think of estimated taxes as something independent contractors have to do. While it’s more common for self-employed individuals to have to pay estimated taxes, anyone who doesn’t have enough taxes withheld could have to make estimated tax payments. That can include employees.

Employer Withheld Taxes in the Wrong State

There are two situations where your employer may have withheld taxes in the wrong state.

• Your employer did things incorrectly.
• Your employer was required to withhold a state or local income tax even though you don’t have to pay that tax. This often happens when local taxes don’t apply to non-resident commuters but local law requires employers to withhold taxes for all employees.

The solution to both situations is to file an income tax return in both states. If you don’t owe taxes, you’ll get a refund.

If you believe your employer withheld taxes in error, ask HR about correcting the issue for next year.