Today, you can learn about resident income tax and what it may mean to your business. In terms of payroll, state tax laws can be complicated because each state has its own laws and regulations—particularly when it comes to personal residency income taxes. Employees must not only pay taxes on income in the states where they earn an income, but must also (in many cases) pay them in the state where they reside for some or all of the taxable year.
It’s important to make sure that all tax rules, including those for the resident income tax (whenever it applies) for all employees are properly followed. The blowback from failing to do so can be severe. Some states offer reciprocal agreements for residents that live in border areas. This allows these residents to work in either of the two states without double taxation.
However, it’s important to educate employees who take advantage of this so that they are filling out the proper paperwork each year to ensure that their exemptions continue. Also be aware that while some states do not tax income, employees must be residents of that state as well as an employee to a company within that state in order to reap those particular benefits.
Each state is mandated to collect a percentage of earned income for residents who meet the requirements of this law. A resident is defined as an individual who lives in a state for a specified amount of time, and this is determined on a state-by-state level. Residency can also be held by temporary status, such as those who are authorized aliens or seasonal workers holding proper work visas.
In terms of those who reside in one state for a certain duration, but whom use another state as their legal residence, the resident income tax applies to the state of legal residence. This can be the case with college students who are on a campus at a different location than where they actually reside the rest of the year. Military personnel are also covered under certain resident statuses, which may require the collection of resident income tax. For spouses of active military members, the Military Spouses Residency Relief Act protects them from having their wages affected by resident income taxes.
For payroll withholding purposes, residency tax is calculated using the most recent year’s employer withholding tables, generally included in updated payroll software or obtainable by the Internal Revenue Service (IRS). Employees may also use the IRS tax calculator to determine their resident tax assessment. This resident tax is withheld from the total gross payment.
This article was syndicated from Business 2 Community: Learn About Resident Income Taxes for Employees
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