Managing Multi-State Tax Compliance

Managing Multi-State Tax Compliance

Although keeping up withmultistate business tax obligations is a complicated task in itself, maintaining tax compliance across state lines is even more difficult. Each state has its own way of taxing business entities that are subject to its jurisdiction and such methods may vary widely. Generally speaking, a business must file a business tax return in any state where it conducts business and must pay taxes on any profits that are earned in that specific state. However, this is where the simplicity ends and state tax liability becomes more complicated.

State income taxes owed by a business to any given state are based on the connection of the business to that particular state.  This connection, called a nexus, can be simple and clear when the business maintains a physical presence in a state but is much more complicated when the business has no physical headquarters and operates exclusively through a website. Because of this, some states are moving toward defining business connections in terms of economic presence rather than physical presence. However, regardless of how the connection is defined, multi-state business taxes are a complicated issue. A C-Corporation must file a corporate tax return and any owner of an LLC, Partnership or S Corporation must file a personal return in each state where the company does business.

The following are a few of the specific areas that highlight the complexity of multi-state tax compliance:

  • Withholding Tax

All businesses, with the exception of those located in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming, are required to withhold income taxes from each employee’s paycheck. This is simple when the business has one physical presence but is much more complicated with large companies that have plants or offices in multiple states or workers that live in one state and work in another.  In some cases, reciprocity agreements exist providing that only one state’s taxes will be withheld
and a single W-2 issued.  However, in the absence of such an agreement, the issue of multi-state withholding taxes can become much less straightforward.

  • Unemployment Tax

Both the federal government and each state require that employers pay an unemployment tax for each employee. Since this tax is largely regulated by the states, keeping up with the state-to-state differences can become a complicated task for bookkeeping services providers serving multi-state companies. Unemployment taxes are usually governed by the state in which the employee works but this is sometimes affected by a reciprocity agreement.

  • Leave Laws

Although the federal government dictates the conditions of the Family and Medical Leave Act, other leave laws are governed by the states. Some states mandate that companies pay their employees during qualified leaves while others do not. This makes compliance in this area a complicated issue for the bookkeeping services providers of some multi-state companies. Generally speaking, however, each employee is governed by the leave laws of the state they are working in.

  • Minimum Wage

Although the base minimum wage is set by the federal government, various states and local governments have set higher rates for their employees. This requires that in-house bookkeepers and bookkeeping services providers of companies operating in more than one location keep up with these various rates as well as the dates when they become effective.

If your business is seeking an outsourced bookkeeping solution, the experienced professionals at Orange County Bookkeeping can provide you with the expertise you are looking for. Our licensed accountants and bookkeepers are equipped to serve Orange County businesses of any size, structure or industry focus. Visit us today at  to learn more about our full range of bookkeeping, tax and business consulting services. Contact us by phone at (949) 242-9852 at or by email at  to receive a free, no obligation consultation.

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