How Much Payroll Tax to Withhold
To get a better sense of what the numbers may look like, the state has published the 2020 withholding schedules for calculation through the Wage Bracket Table Method (“Method A,” for incomes below $1 million) and the Exact Calculation Method (“Method B”).
The amount of UI and ETT tax a business has to pay will be a certain percentage of the first $7,000 in wages that the business’ employees earn. The percentage a business will pay yearly per employee whose earnings surpass $7,000 can range from 3.4 percent ($238, for the first two to three years) to 6.2 percent ($434). For the ETT tax, employers can expect to pay 0.1 percent or $7 per employee earning over $7,000.
For calculation of the UI, ETT, and SDI taxes, all jurisdictions use the Localization, Base of Operations, Place of Direction and Control, and Residence of Employee tests.
(California Unemployment Insurance Code (UIC) §602); (California Employment Development Department Information Sheet).
By walking through each of these tests, companies can be better equipped to make the right choice regarding where it must remit payroll taxes for its multi state workers. However, California companies can simplify the process by filling out Form DE2325, Employer’s Election to Cover A Multi‑State Worker Under The California Unemployment Insurance Code (22 CCR § 454(a)-1).
Any state that has signed on to the Interstate Reciprocal Coverage Arrangement may elect to remit taxes to only one jurisdiction in which the multistate employee is performing their services. All jurisdictions with the exception of Alaska, Kentucky, Mississippi, New Jersey, New York, and Puerto Rico have signed on.
Reciprocal Agreements for Payroll Taxes
While a business may have employees who live in one state and work in another, not all such situations will require tax withholding from each of the states in question. Various states have reciprocal tax agreements which allow employees working and living in two different states to request an exemption from taxation in one of the states. (TurboTax’s list of the current reciprocal agreements between the states).
For example, Arizona has reciprocity with California so California residents working in Arizona can opt out of having Arizona taxes withheld by completing the state’s Withholding Exemption Certificate.
If an employee receives an exemption, they may present their employer with an exemption form. Once the employer has received the proper documentation, it can withhold taxes from the employee’s home state only rather than from both jurisdictions.
Applying Payroll Taxes to Your Multistate Employees
Multistate business has grown exponentially, especially with the uptick in online commerce. It is not uncommon for a business to have employees not only in California but across the nation, especially if the business ships merchandise from different states or has its customer service personnel working remotely from different regions.
While this type of organization is obviously more efficient and certainly advantageous from a health perspective, it can cause some real headaches for employers. There are many withholding forms that the employer must file with different state taxation authorities.
Fortunately, there are a multitude of online resources to help you determine withholding amounts and whether the different states have tax reciprocity and the good news is that only a handful do not. (California is a reciprocal state.)