CPM Multi-State Nexus & Reciprocity 2 — Questions and Answers
Question 1: An employee lives in State A but works exclusively in State B, which has no reciprocity agreement with State A. Which states require withholding?
- Only State A (residence)
- Only State B (work) (Correct answer)
- Both State A and State B
- Neither state unless income exceeds a threshold
Correct answer: Only State B (work)
Without a reciprocity agreement, withholding is required only in the state where the work is performed (State B); the employee handles State A obligations via their own return.
Question 2: A reciprocity agreement between two states typically allows an employee to:
- Avoid all state income taxes permanently
- Have taxes withheld only for their state of residence (Correct answer)
- Split withholding equally between work and home states
- Receive a payroll tax credit from the federal government
Correct answer: Have taxes withheld only for their state of residence
Reciprocity agreements let qualifying employees request that their employer withhold only for the state where they live, eliminating double filing.
Question 3: What document must an employee typically submit to claim reciprocity withholding from their employer?
- Form W-4 only
- A state-specific exemption certificate for the work state (Correct answer)
- IRS Form 8822-B
- A letter from their CPA
Correct answer: A state-specific exemption certificate for the work state
Each state that participates in a reciprocity agreement has its own exemption certificate (e.g., VA Form VA-4, PA Form REV-419) that the employee files with the employer.
Question 4: Nexus for payroll withholding purposes is generally established when:
- A company has more than $1 million in annual revenue nationwide
- An employee performs services in a state, even temporarily (Correct answer)
- A company is incorporated in a state
- An employee's home office is in a different state than HQ
Correct answer: An employee performs services in a state, even temporarily
Most states trigger withholding nexus as soon as an employee performs services within the state, regardless of the employer's physical location.
Question 5: Which of the following best describes a 'convenience of the employer' rule for remote workers?
- Employees are taxed only where their employer's HQ is located
- Remote work days are taxed in the employer's state unless the remote work is required by the employer (Correct answer)
- All remote work is exempt from state income tax
- The employee chooses which state receives the withholding
Correct answer: Remote work days are taxed in the employer's state unless the remote work is required by the employer
States like New York apply the convenience rule, sourcing remote work days to the employer's state unless the remote arrangement is a necessity imposed by the employer.
Question 6: A traveling salesperson works 10 days in State X during the calendar year. State X has a de minimis exemption for fewer than 14 days. What is the payroll withholding requirement?
- Withhold for State X for all 10 days
- No withholding is required for State X (Correct answer)
- Withhold for the employee's home state only
- Split withholding between State X and the home state
Correct answer: No withholding is required for State X
State X's de minimis threshold protects employees who work fewer than the threshold number of days, so no withholding is required for those 10 days.
Question 7: When an employer registers in a new state for payroll withholding purposes, which agency typically issues the employer withholding account number?
- The IRS
- The state's department of revenue or taxation (Correct answer)
- The Social Security Administration
- The state's department of labor for unemployment only
Correct answer: The state's department of revenue or taxation
State income tax withholding accounts are administered by the state's revenue or taxation department, which issues the withholding registration number.
CPM Multi-State Nexus & Reciprocity 2
An employee lives in State A but works exclusively in State B, which has no reciprocity agreement with State A.
Which states require withholding?