State and Local Tax Compliance Flashcards

A 'reciprocity agreement' between two states means that:

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.

Which of the following cities imposes a local income tax that employers must separately withhold from employee wages?

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.

Pennsylvania's local Earned Income Tax (EIT) is administered by:

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.

When an employee changes their state of residence mid-year, the employer should:

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.

In the context of state payroll taxes, 'nexus' refers to:

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.

The 'physical presence test' for multi-state payroll withholding generally means:

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.