CPP Multi-State Payroll Compliance 3 — Questions and Answers
Question 1: 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?
- All remote workers regardless of duties
- Employees whose only in-state activity is soliciting orders for tangible personal property approved and filled from outside the state (Correct answer)
- Employees earning less than $50,000 in the state
- Employees on temporary assignments lasting fewer than 30 days
Correct 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.
Question 2: 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?
- The number of miles traveled in the state
- De minimis or safe-harbor thresholds set by individual states (days worked or income earned) (Correct answer)
- A uniform federal 10-day rule applicable in all states
- Whether the employee files a personal return in that state
Correct 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.
Question 3: How does SUI (State Unemployment Insurance) apply when an employee works in multiple states during the year?
- SUI is paid to every state in which the employee worked
- SUI is paid to one state only, determined by a four-step localization test under the FUTA guidelines (Correct answer)
- SUI is always paid to the employer's headquarters state
- FUTA replaces SUI entirely for multi-state workers
Correct 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.
Question 4: 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?
- State B, because that is where the employee spent the most time during the year
- State A, because localization takes priority in the four-factor test (Correct answer)
- Both states proportionally by months worked
- The federal government, since the assignment exceeds six months
Correct 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.
Question 5: Which states require employers to use their own state withholding form instead of the federal Form W-4?
- All states require their own separate form
- No states; the federal W-4 is universally accepted
- Several states (e.g., California, New York, Maryland) require or use their own state-specific withholding certificates (Correct answer)
- Only states with no income tax require separate forms
Correct 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.
Question 6: If an employer pays supplemental wages (such as a bonus) to a multi-state employee, which state's supplemental withholding rate applies?
- The federal supplemental rate of 22% applies uniformly in all states
- Each state's own supplemental rate applies to the portion of the bonus allocated to that state (Correct answer)
- The work state's rate always applies to the entire bonus
- Supplemental wages are exempt from state withholding
Correct 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.
Question 7: What is the tax treatment of an employee's moving expense reimbursement received after January 1, 2018, under the Tax Cuts and Jobs Act?
- It is fully excludable from federal and state income if the move is job-related
- It is included in taxable wages for federal purposes; state treatment varies (Correct answer)
- It is deductible by the employee on Schedule A
- It is exempt only if the move crosses state lines
Correct 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.
CPP Multi-State Payroll Compliance 3
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?