HR Hotline: Do We Have to Withhold New York Taxes for an Employee Who Lives There?
Q: We have several employees who reside in New York state and commute to our Connecticut office. One has asked that we withhold New York taxes from his paycheck so he can avoid underwithholding. Our payroll administrator is busy enough complying with Connecticut tax requirements, insurance, garnishments, etc. Registering with New York tax authorities seems like a dangerous path to go down. Are we subject to New York withholding requirements?
A: The good news for you, assuming your company is not incorporated or licensed under New York state law and does not maintain an office in New York, is that as an out-of-state employer, you are not required to withhold New York state income taxes on your New York resident employees working at your Connecticut company.
The bad news for your New York resident employees is that their home state most likely has the right to tax all of their income, regardless of where it is earned. Connecticut also claims the right to income taxes on wages earned in Connecticut.
This should not result in double taxation, however, as your New York employee will have the opportunity, on his New York state tax return, to claim a credit for taxes withheld and paid to Connecticut.
Connecticut employers might have to register and administer New York (or Massachusetts or Rhode Island) tax withholdings if they have offices in another state or significant business operations there.
Or you may volunteer to withhold out-of-state income taxes for the convenience of your non-Connecticut resident employees, although it seems that the more efficient approach is to stick with Connecticut withholding and advise employees to reconcile tax obligations yearly when filing.
Everyone, including your payroll person, should check with his or her own tax advisor/accountant for specific guidance.
The state Department of Revenue Services also offers guidance documents addressing this specific issue. See for example the Connecticut Circular CT Employer’s Tax Guide.
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