Payroll Discussion about the State tax withholding mess and various important topics, studies, strategies, and general notes are discussed here.
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State tax withholding mess
I have just been hired by a very green start-up based in MO. The company had remote workers in 4 different states last year. They withheld MO taxes from their wages rather than where they worked and lived. What is our legal responsibility now? Are we correcting withholding tax in the future and are employees just adjusting their 2020 income taxes with non-resident returns? Or am I required to pay these states last year’s missing deductions and claim reimbursement from MO as a business?
This thread was originally published on 2021-02-07 09:20:56.
Employees, Customers, and any companies can make use of the State tax withholding mess study which has a detailed view of the mess of state withholding tax with payroll procedures, processes, and applications.
I would not fix anything withholding related in 2020. This opens a unnecessary can of worms with registrations, late filings, penalty and interest on the withholding payment etc, amended MO returns, and W2c’s.
However, I might also suggest checking the the company’s outside CPA if they have another recommendation.
The employees should file a non-resident with MO to get a refund, as well as file with their resident state and pay. File the non-res early and first, this should hopefully ease the pain of paying out to the resident state. Fix the situation for 2021 by moving the wages for January-current. There is no legal obligation to cover any employee filing costs, but my suggestion, would be for the company to pay the $50 or some reasonable cost to cover the non-resident tax return filing. Be open with the employee about what happened.
My speculation based on what you describe, is that their unemployment filing are wrong as well. This should be corrected for 2020 in the event the employee leaves/terminated and they need to file.
I know several cities in MO have local tax. I’m not fully familiar with them, but you may need to have more hands on with the employee to ensure they receive anything withheld in erorr.
There’s nothing you can do to fix 2020 withholding and W-2 forms. The money is with MO and the employees have to file return to request a refund. You don’t have to pay any of the tax they owe to their home State. You *may* as a show of good faith reimburse them for additional additional fees they have to pay to prepare/file this MO return requesting a refund. Depending on the State where they live/work you might have to establish a withholding account in that State. The requirements in each State and what constitutes a nexus vary. Does the withholding State show on the pay stub? If so this is as much the fault of the employee for not noticing all year.
Unemployment is another matter. You are legally required to accurately report wages based on the primary work location. It’s not optional that you fix those returns if you reported all the wages to MO.
So I’m about to report and pay the missed UI to KS for 2020. Am I ever going to see the UI we paid to Missouri unnecessarily?
It’s possible that it’s fine that only MO taxes were withheld. The rules as to whether you need to withhold are based on whether that remote employee caused your company to establish nexus in the remote worker’s home state.
Only after determining whether you should withhold those taxes should you register in those states that require it.
IMO, At this point, it may be best to let the employees, file with both MO and their home state. Their home state will likely give a credit for taxes paid to other jurisdictions which would cover their home state tax owed for the year.
Your company does not have to do anything for 2020. The employees can deal with it themselves on their tax returns. Going forward I would stop withholding Missouri for those employees if they are not doing any work in Missouri.
glad I joined this subreddit, thanks for all of your responses!
You have to pay your state taxes and get a refund from the incorrect state. Your employer messing up doesn’t exempt you from your own state tax liability.