What is State Income Tax (SIT)

State income tax is a tax levied by individual states on the income of residents and, in some cases, non-residents who earn income in that state. As a payroll manager, understanding how state income taxes work is crucial to ensuring compliance.

State Income Tax (SIT) Overview

State income tax (SIT) is a tax on income earned by individuals within a state. For states that impose an income tax, the rate is often progressive, meaning it increases as an employee’s income rises. However, some states have flat tax rates where all income is taxed at the same percentage.

🗝️ Key Responsibilities of Payroll Management

As a payroll manager, it's essential to ensure the accurate withholding of state income taxes for each employee, based on their state of residence and work. Here’s what you should focus on:

Employee State Residency

Employees typically pay state income tax based on their state of residence. It’s critical to keep track of where employees live and work, particularly in cases where they live in one state and work in another. If you have an employee that works from home, make sure you are leveraging the remote work location feature in our product.

State Withholding Certificates

Many states have their own version of the federal Form W-4 to calculate the appropriate amount of state income tax to withhold. Employees should complete the correct state withholding certificate when they start employment or if their personal circumstances change (e.g., moving to a new state, marriage, or having a child).

Tax Reciprocity Agreements

Some states have reciprocity agreements with neighboring states, allowing employees to pay taxes in their state of residence, even if they work in another state. For example, if an employee lives in Pennsylvania but works in New Jersey, a reciprocity agreement may allow them to pay only Pennsylvania state income tax. Reciprocity is automatically calculated with GoCo Embedded Payroll. 

✅ SIT Calculations and Payments with GoCo Embedded

GoCo Embedded Payroll simplifies the management of state income taxes for your business. Here's how it works:

1. State Income Tax Rates

GoCo Embedded Payroll automatically calculates the appropriate state income withholdings based on the tax rate you provided during set up and the details within the employee's profile (residence and work location). It is essential to make sure the information you provide is accurate and timely updated when a change occurs. 

2. Withholding and Payments

With each pay run, GoCo Embedded Payroll (through our payroll partner) will debit employee wages, taxes, and other deductions, holding them for processing to the appropriate tax agencies.

3. Reporting

GoCo Embedded Payroll will also handle state income tax reporting to the applicable tax agencies on your behalf, based on the filing frequency you’ve provided. If you receive a notice of a frequency change, please notify support@goco.io immediately.

For more instruction on where to locate your payroll tax document filings check out Company Documents

🏡 Multi-State Employees and State Income Tax

When employees live or work in multiple states, managing state income tax can get more complex. Here's how we handle these situations:

1. Employees Living and Working in Different States

In general, payroll should withhold taxes for the state where the employee works, unless a reciprocity agreement allows for withholding in their state of residence. For example:

• If an employee lives in Connecticut but works in New York, New York state income tax is withheld unless a reciprocity agreement allows for Connecticut taxes to be withheld instead.

2. Employees Moving to a New State

If an employee moves to a new state, the payroll system must be updated with the new state’s tax laws. Be sure to have the employee complete a new state withholding certificate for their new state of residence. Delays in providing updated information can result in payroll errors and/or the need for corrections. 

3. Remote Employees

For remote employees, the tax treatment may differ depending on the states involved. Some states tax based on where the work is performed, while others tax based on where the employee lives. Ensure the payroll system reflects the correct locations for accurate tax withholding.

⭐ Special Considerations for State Income Tax

Local Taxes

In some states, there are additional local income taxes (e.g., city or county taxes). Be sure that these local taxes are registered, and that GoCo Embedded Payroll is set up to calculate and remit these additional taxes for your employees. For more information, check out our article on Local Taxes.

State Income Tax Credits

Employees who work in one state but live in another may be eligible for state income tax credits to avoid double taxation. It’s a good idea to recommend that employees consult a tax professional to take advantage of any available credits.

Non-Resident Taxation

Some states impose taxes on non-residents who earn income within the state. If you have employees who live in one state but work in another, ensure the appropriate non-resident taxes are withheld. You can verify this by reviewing the employee’s profile to ensure their residence and work locations are accurate.

Courtesy Withholding

In some situations, employers may elect to provide ability for Employees to do a courtesy withholding. Courtesy withholding refers to an optional practice where an employer can withhold state taxes for employees who work in a different state from where the company is based. This can be helpful in situations where an employee works or lives in a state other than the employer’s primary location. This is common with employees who live in a neighboring state and commute to an office across a state line. 

If an employer wants GoCo to withhold state taxes for a state where an employee does not work, the employer can request this service, and GoCo will set up courtesy withholding for that state. Just reach out to support@goco.io 

❗Costly Mistakes to Avoid

Failure to Register in Each State

If you have employees in multiple states, make sure you are registered for tax accounts in each state. Failure to do so can result in penalties and non-compliance issues.

Not Updating State Withholding for Employee Moves

When an employee moves to a new state, update their state income tax information in the payroll system immediately to reflect the new requirements and avoid any errors.

For any additional questions, please reach out to us at support@goco.io 💚