CPM Multi-State Nexus & Reciprocity 3 — Questions and Answers
Question 1: An employee moves from State A to State B mid-year. Which state's rules govern withholding for wages earned after the move?
- State A for the entire year since that is where the year began
- State B for wages earned after the move, State A for wages before (Correct answer)
- The federal government determines allocation
- Both states must be withheld for throughout the entire year
Correct answer: State B for wages earned after the move, State A for wages before
Withholding follows the employee's current circumstances; wages earned after the move are subject to State B's rules, while pre-move wages follow State A's rules.
Question 2: Which of the following pairs of states does NOT have a reciprocity agreement with each other (as of current law)?
- Maryland and Virginia
- Pennsylvania and New Jersey
- California and Nevada (Correct answer)
- Indiana and Kentucky
Correct answer: California and Nevada
California does not participate in any reciprocity agreements, so California-Nevada workers must deal with each state's separate withholding and filing requirements.
Question 3: A company sends an employee to work at a client site in another state for 60 days. The employer is concerned about SUI (state unemployment insurance) liability. SUI is generally owed to:
- Every state the employee worked in during the year
- The state where the employee's base of operations is located or where the employee's services are directed from (Correct answer)
- The state with the highest SUI rate
- The federal government via FUTA only
Correct answer: The state where the employee's base of operations is located or where the employee's services are directed from
FUTA's localization rules assign SUI to one state using a four-part test: localization, base of operations, direction/control, then domicile.
Question 4: The FUTA four-factor test for multi-state employees applies in which order?
- Domicile → localization → base of operations → direction and control
- Localization → base of operations → direction and control → domicile (Correct answer)
- Direction and control → domicile → localization → base of operations
- Base of operations → localization → domicile → direction and control
Correct answer: Localization → base of operations → direction and control → domicile
FUTA regulations apply the factors in order: first check if services are localized in one state, then base of operations, then direction/control, then domicile.
Question 5: An employee works in three states during the year. For state income tax withholding, the employer must generally:
- Withhold only for the state with the highest tax rate
- Register and withhold in each state where services are performed (Correct answer)
- Allow the employee to self-remit to all states
- Withhold only at the federal level and let states sort it out
Correct answer: Register and withhold in each state where services are performed
Each state where an employee performs services generally requires the employer to register for withholding and remit taxes for wages earned in that state.
Question 6: Which statement correctly describes a 'credit for taxes paid to another state' as it relates to payroll?
- Employers receive a payroll tax credit on Form 941 for over-withheld state taxes
- Employees may claim a credit on their resident state return for income taxes paid to another work state (Correct answer)
- The IRS refunds excess state taxes automatically
- Credits are available only if a reciprocity agreement is in place
Correct answer: Employees may claim a credit on their resident state return for income taxes paid to another work state
Most states allow resident taxpayers to claim a credit on their resident return for income taxes properly paid to a non-resident work state, preventing true double taxation.
Question 7: A payroll manager discovers an employee has been working remotely from a state where the company is not registered. The most immediate compliance step is to:
- Stop paying the employee until they relocate back
- Register with the new state's taxing authorities and begin withholding retroactively if required (Correct answer)
- File an amended federal 941 to offset the liability
- Issue a corrected W-2 at year-end and take no other action
Correct answer: Register with the new state's taxing authorities and begin withholding retroactively if required
The employer must register in the state for withholding (and often SUI) and determine any back-withholding obligations from when nexus was established.
CPM Multi-State Nexus & Reciprocity 3
An employee moves from State A to State B mid-year.
Which state's rules govern withholding for wages earned after the move?