Fundamental Payroll Certification State and Local Tax Compliance 2 — Questions and Answers
Question 1: A 'reciprocity agreement' between two states means that:
- Both states share tax revenue equally
- Employees working across state lines pay income tax only to their state of residence (Correct answer)
- Employers pay double the normal tax rate
- The states use identical tax forms and rates
Correct answer: Employees working across state lines pay income tax only to their state of residence
A state reciprocity agreement allows residents who work in a neighboring state to have income tax withheld only for their home state, avoiding double-state taxation.
Question 2: Which of the following cities imposes a local income tax that employers must separately withhold from employee wages?
- Austin, Texas
- Miami, Florida
- New York City, New York (Correct answer)
- Las Vegas, Nevada
Correct answer: New York City, New York
New York City imposes its own local income tax on residents and workers, which employers must withhold in addition to state and federal taxes.
Question 3: Pennsylvania's local Earned Income Tax (EIT) is administered by:
- The Pennsylvania Department of Revenue
- Local tax collectors or tax collection districts (Correct answer)
- The IRS on behalf of municipalities
- Each employer remitting directly to each township
Correct answer: Local tax collectors or tax collection districts
Pennsylvania's local EIT is administered by local tax bureaus or collection districts, requiring employers to identify the correct collector for each employee's work and home location.
Question 4: When an employee changes their state of residence mid-year, the employer should:
- Continue withholding for the original state for the entire year
- Update records and begin withholding for the new state going forward from the change date (Correct answer)
- Withhold for both states simultaneously for the rest of the year
- Stop all state withholding until January 1
Correct answer: Update records and begin withholding for the new state going forward from the change date
When an employee relocates, the employer updates withholding prospectively to the new state starting from the effective date of the move.
Question 5: In the context of state payroll taxes, 'nexus' refers to:
- A type of payroll software platform
- A sufficient connection between a business and a state that creates tax obligations (Correct answer)
- The employer identification number format used by a state
- A reciprocity agreement between two states
Correct answer: A sufficient connection between a business and a state that creates tax obligations
Nexus is the minimum connection a business must have with a state before that state can require the employer to withhold and remit payroll taxes.
Question 6: The 'physical presence test' for multi-state payroll withholding generally means:
- Withholding is required only in the employer's home state
- Withholding is required in any state where the employee physically performs work (Correct answer)
- Employees must be physically present in the payroll office to receive payment
- Only salaried employees are subject to multi-state withholding
Correct answer: Withholding is required in any state where the employee physically performs work
The physical presence test requires an employer to withhold state income tax for any state in which an employee physically performs services, regardless of where the employer is based.
Fundamental Payroll Certification State and Local Tax Compliance 2
A 'reciprocity agreement' between two states means that: