Non-Resident Income Tax Withholding for Mobile Employees

Having employees work outside the traditional office is becoming more common, especially as technology and travel make it easier to work from different locations. This trend coincides with state governments having persistent budget shortfalls, leading to state audits of employers for income tax withholding. These events have given rise to new problems for employers because of state income tax rules for non-resident employees. Often, this problem becomes pronounced when an employer is located on the border, between states, such as an Omaha employer having Iowa residents as employees.  States are now looking to ensure that non-residents working in their state are paying the proper amount of income taxes, and to the right state.

Every state has unique rules for employer income tax withholding of non-resident employees, but in Nebraska, the employer is responsible for withholding income tax for all non-resident employees working in Nebraska. For example, an Iowa employee working for a Nebraska company must have income tax withheld for the state of Nebraska at the same rate as any Nebraska resident. If the company is not a Nebraska employer, the employer must still withhold Nebraska income tax when the employee performs services in Nebraska and transacts business greater than $600 or maintains an office in the state.

These rules can become complicated for the human resources department, but if not properly evaluated, it may trigger an inadvertent violation. For example, if an employer allows an employee to regularly work from home, but the employee lives in another state, it may be possible that the employer is responsible to the other state for withholding. To avoid these problems, ensure that clear policies for working remotely exist and that the employer has a clear understanding of where employees spend substantial time working.

© 2016 Vandenack Weaver LLC
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