Multi-State Payroll Compliance Flashcards

Under the federal Interstate Commerce Tax Act (P.L. 86-272), which employees are protected from a state's income tax withholding obligations imposed on their employer?

Answer: Employees whose only in-state activity is soliciting orders for tangible personal property approved and filled from outside the state

P.L. 86-272 limits a state's ability to impose net income tax on businesses whose only in-state activity is soliciting sales of tangible personal property fulfilled from outside the state.

A traveling salesperson works in seven states during the year. Which threshold concept determines when the employer must begin withholding income tax for each state visited?

Answer: De minimis or safe-harbor thresholds set by individual states (days worked or income earned)

Many states provide de minimis safe harbors (commonly based on days worked or dollar thresholds) below which employers are not required to withhold income taxes.

How does SUI (State Unemployment Insurance) apply when an employee works in multiple states during the year?

Answer: SUI is paid to one state only, determined by a four-step localization test under the FUTA guidelines

Under FUTA guidelines, SUI is paid to a single state using a four-factor localization test: localized work state, base of operations, direction/control state, or employee's residence state.

An employee is 'localized' in State A under the FUTA four-factor test but temporarily assigned to State B for eight months. Where should SUI be paid?

Answer: State A, because localization takes priority in the four-factor test

Localization—working predominantly in a single state—is the first and highest priority factor in the FUTA test, so SUI goes to State A even during extended temporary assignments.

Which states require employers to use their own state withholding form instead of the federal Form W-4?

Answer: Several states (e.g., California, New York, Maryland) require or use their own state-specific withholding certificates

States such as California (DE 4), New York (IT-2104), and Maryland (MW507) have their own withholding forms that employees must complete in addition to or instead of the federal W-4.

If an employer pays supplemental wages (such as a bonus) to a multi-state employee, which state's supplemental withholding rate applies?

Answer: Each state's own supplemental rate applies to the portion of the bonus allocated to that state

Each state has its own supplemental withholding rate, and the employer must apply each state's rate to the portion of supplemental wages allocated to that state.

What is the tax treatment of an employee's moving expense reimbursement received after January 1, 2018, under the Tax Cuts and Jobs Act?

Answer: It is included in taxable wages for federal purposes; state treatment varies

TCJA suspended the moving expense exclusion for most employees through 2025, making employer reimbursements taxable wages federally, though some states still allow an exclusion.