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Master Tip: Working with Multi-State Employers By: QuickBooks Payroll Group Product: QuickBooks Payroll Tip Category: Best Practices

Situation

You have acquired a client whose employees travel from their residence in another state to work at the client company. Or the client company is based in one state, but some of its employees work from their home in another state.

Response

In cases such as these-where employees live or work in a state different from the state where the client company is located-you will need to take extra care in setting up the payroll, so QuickBooks Payroll withholds the correct amounts and your payroll tax filings proceed smoothly. Since you may be sharing these comments directly with your clients, from this point forward all discussion will be as if directed to the business owner or the bookkeeper. References are specific to QuickBooks 2007 but may be applicable to earlier versions.

Here are some tips to help you set up multi-state payroll items and employee records in QuickBooks

1. Learn the requirements for your state and your employees' states.
2. Set up state income tax withholding, SUI, and SDI in QuickBooks for each state where you withhold state income tax or to which you pay SUI or SDI.
3. Enter state payroll tax information in QuickBooks and assign employee withholding, SUI, and SDI to the correct state.
4. Complete and file Schedule A (Form 940) if you paid state unemployment tax in more than one state.
5. Learn about county and local payroll taxes.
6. Set up miscellaneous state or local payroll taxes in QuickBooks.
7. Enter miscellaneous state or local payroll tax information in QuickBooks.

1. Learn the Requirements for Your State and Your Employees' States

State income tax withholding, state unemployment insurance, state disability insurance, child support withholding, pay frequency, minimum wage, and other requirements can vary from state to state. A good place to start is by obtaining information from your state agency and the agencies in the states where your employees work and live. Follow these links to state agencies.

2. Set Up State Income Tax Withholding, SUI, and SDI in QuickBooks for Each State Where You Withhold State Income Tax or to Which You Pay SUI or SDI

In QuickBooks, you need to set up a payroll item for each state where you withhold state income tax and for each state to which you pay state unemployment insurance (SUI) and state disability insurance (SDI). QuickBooks tracks each state tax separately, so you know exactly how much you owe for each tax and each state.

If you pay SUI and SDI as a company expense and also withhold it from employee earnings, you need to use separate payroll items for the company expense and the employee withholding. If this is the case for your state(s), QuickBooks helps you set up both payroll items at the same time. The states of California, Hawaii, New Jersey, New York, Rhode Island, and Puerto Rico collect disability insurance from employers.

To set up payroll items for state income tax withholding, SUI, or SDI in QuickBooks

1. From the Lists menu, click Payroll Item List.
2. Click the Payroll Item menu button, then click New.
3. In QuickBooks 2007 and 2005, choose Custom Setup, then click Next.
4. Click State Tax as the type of tax you want to create and click Next.
5. Click the state's two-letter abbreviation from the drop-down list.
6. Click State Withholding (or State Unemployment or State Disability, depending on the payroll item you're setting up) and click Next.
7. Follow the onscreen instructions.

If you need to go back to a previous window, click Prev.

Make sure you enter your state account numbers on the appropriate payroll item. Otherwise, these numbers won't appear automatically in the state payroll tax forms you prepare in QuickBooks.

To edit a state reporting number:

1. From the Lists menu, choose Payroll Item List.
2. Select the payroll item you use for the particular state.
3. Click the Payroll Item button.
4. Choose Edit.
5. Click Next until you reach the screen that displays the Enter the number that identifies you to agency field.
6. Edit your state account number in that field. Double-check to make sure you entered the number correctly. If you mistype it and it appears incorrectly on your state tax form, your state might not give you credit for your payments.
7. Click Next until the last screen, then click Finish.

3. Enter State Payroll Tax Information in QuickBooks and Assign Employee Withholding, SUI, and SDI to the Correct State

You will need to enter state income tax withholding information in each employee's record in QuickBooks, and you will need to assign states for an employee's withholdings and SUI and SDI taxes. When an employee lives and works in different states, you must make sure that you have assigned the correct states to the employee's withholdings and SUI and SDI taxes. That way, QuickBooks will calculate the correct taxes and withholdings, and you will make the correct payments to the right states. Regulations about which state to pay vary by state, so check with your accountant or tax advisor to find out where your employee should pay taxes.

To assign states for an employee's withholdings and SUI and SDI taxes:

1. In QuickBooks 2007 and 2006: Click the QuickBooks Employee Center, and then click the Employees tab.
   In QuickBooks 2005: From the QuickBooks Employees menu, choose Employee List.
2. Double-click the employee to open the Edit Employee window.
3. In the Edit Employee window, select Payroll and Compensation Info from the Change tabs drop-down list.
4. Click the Taxes button, and then click the State tab.
5. In the State Worked section, select the appropriate state from the State drop-down list. (Check with your accountant or tax advisor to find out which state to choose here.)
6. Depending on the state you select, QuickBooks displays the SUI and SDI checkboxes. If the employee is subject to state unemployment insurance, either paid by the company or withheld from the employee's paycheck, select the SUI checkbox. If your state has state disability insurance and the employee is subject to it, select the SDI checkbox.
7. In the State Subject to Withholding section, click the State drop-down list and select the state that collects the state income tax for this employee. (Check with your accountant or tax advisor for this information.)
8. Enter the filing status and other information from the state withholding form the employee gave you.
9. Do one of the following:
• To continue entering tax information, click either the Federal or the Other tab.
• If you have no more tax information to enter, click OK to return to the Edit Employee window.

4. Complete and File Schedule A (Form 940) If You Paid State Unemployment Tax in More Than One State

You must complete and file Schedule A (Form 940): Multi-State Employer and Credit Reduction Information with Form 940 if you were required to pay:

• State unemployment tax in more than one state.
• Wages in any state that is subject to credit reduction. (In the 2006 tax year, no states were subject to credit reduction.)

Form 940 is an annual tax form on which you report your federal unemployment (FUTA) tax liability. For more information about and instructions for filing Form 940 and Schedule A, contact the IRS.

5. Learn about County and Local Payroll Taxes

In some locations, the city where an employee works will require a city income tax to be withheld from earnings. In some municipalities and counties, an employee may pay a tax for the privilege of working in that city or county. Such taxes are levied to raise revenues for various reasons, and may not necessarily be based on a percentage of employee earnings. Employers may also be required to pay or share in such a tax. Such taxes are sometimes called head or employment taxes, because an employee is taxed (or charged a license fee) for working in a particular location, rather than being taxed on income.

For more information about local tax withholding requirements, consult your local government or tax agency.

6. Set Up Miscellaneous State or Local Payroll Taxes in QuickBooks

If you have miscellaneous state or local payroll taxes that you are required to pay, then you need to set up a payroll item in QuickBooks for each tax. You can choose from the QuickBooks list of common miscellaneous state and local taxes, which includes taxes such as the California employment training tax and the New York City resident tax. Or, you can set up taxes that aren't on the list.

To set up payroll items for predefined miscellaneous state and local taxes:

1. From the Lists menu, click Payroll Item List.
2. Click the Payroll Item button and then click New.
3. In QuickBooks 2007 and 2005, choose Custom Setup and then click Next.
4. Click Other Tax as the type of tax you want to create, and then click Next.
5. Choose a predefined miscellaneous state and local tax.
6. Follow the onscreen instructions.

To go back to a previous window, click Prev.

To set up a payroll item for a tax that is not on the predefined list, follow these instructions for a user-defined, other tax payroll item:

1. From the Lists menu, click Payroll Item List.
2. Click the Payroll Item menu button, then click New.
3. In QuickBooks 2007 and 2005, choose Custom Setup then click Next.
4. Click Other Tax and click Next.
5. Click the drop-down list and choose User-Defined Tax.
6. Do one of the following:
• If the tax is withheld from employee wages, select Tax is paid by the employee.
• If the tax is paid by the company, select Tax is paid by the company.
7. Click Next.
8. Follow the onscreen instructions to complete the display name on paychecks and tax agency information.
9. On the Tax tracking type window do one of the following:
• If the tax is withheld from employee wages, choose either Local (Loc. 1 in some earlier versions) Income Tax or Secondary Loc. Tax (Loc. 2 Income Tax in some other versions). This tax will be reported as a local tax on W-2 forms of employees subject to the tax.
• If the tax is paid by the company, choose Co. Paid Other Tax.
10. Click Next.
11. On the Calculate based on quantity window, select the second checkbox only if this tax is based on days or hours worked.
12. On the Default rate and limit window, follow the onscreen instructions. (If this tax has an annual taxable wage limit, do not enter the taxable wage limit. Instead, enter the maximum amount of tax. For example, if only the first $7,000 of wages is taxable and the tax rate is 0.5%, enter $35-and not $7,000-as the annual limit.)
13. On the Taxable compensation window, be sure all compensation items subject to this tax are selected.
14. On the Pre-tax deductions window, be sure that the only items selected are the ones that are deducted from wages before the tax is calculated. Check with your accountant or local tax agency if you are not sure what effect your deductions have on this tax.
15. Click Finish.

7. Enter Miscellaneous State or Local Payroll Tax Information in QuickBooks

If you are required to track miscellaneous state and local payroll taxes, make sure these taxes are also entered in each employee's record.

1. In QuickBooks 2007 and 2006: Click the QuickBooks Employee Center, and then click the Employees tab.
   In QuickBooks 2005: From the QuickBooks Employees menu, choose Employee List.
2. Double-click the employee to open the Edit Employee window.
3. In the Edit Employee window, select Payroll and Compensation Info from the Change tabs drop-down list.
4. Click the Taxes button. Click the Other tab.
5. If the employee is subject to one of the miscellaneous state or local taxes in the drop-down list in the Item Name field, click that tax.
If the tax you want is not listed, choose Add new from the drop-down list and set up a new "other" tax payroll item.
6. If any blank fields appear on the Other tab for the tax you chose, fill them in.
If you are not asked for the tax rate, QuickBooks already has the rate in its tax table.
For additional information that will help you fill in the fields, go to Intuit's State and Local Payroll Taxes Web site. http://www.intuit.com/quickbooks/products/tax/localtax.htm
7. If the employee is subject to more taxes, choose them from the drop-down list.
8. Do one of the following:
• To continue entering tax information, click either the Federal or the State tab.
• If you have no more tax information to enter, click OK to return to the Edit Employee window.

Last Updated: 05/03/2007

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