Fancy Payroll Words

Sometimes you may hear big, fancy payroll words and don’t know what they mean.  For example, NEXUS.  You may hear, “My company has NEXUS in 48 states.”  Sound impressive?  What NEXUS really means is that a company has some sort of business presence in 48 states, so it is subject to state income taxes in those 48 states.  If a business leases or owns any property in a state, or collects any income from the state, or employs employees in the state besides just salespeople, or owns property or capital assets in the state then they have NEXUS in that state.

And then sometimes you may hear RECIPROCITY in a conversation.  That’s the “you scratch my back, I’ll scratch your back” agreement that states can make with each other when it comes to residents and non-residents paying state income tax.  Generally, you pay state income tax in the state where you live, but what if you work in a different state than the state where you live?  The states want income tax paid on wages earned in their states, so non-residents who need to pay state income tax to the state where they live could end up paying two states! 

When this happens, they can usually take a credit on their personal return to their state of residence for the taxes they paid to the state where they worked.  In an effort to ease this taxpayer burden, many states have entered into RECIPROCITY agreements where residents of one state can request exemption from tax withholding in another state.  For example, if you work in Indiana and are a resident of Kentucky, Michigan, Ohio, Pennsylvania, or Wisconsin, you do not have to pay Indiana income taxes on your wages; you would submit exemption Form HW-47 to your employer.  Check your state website to see if you can work RECIPROCITY into your conversations.

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Senior Analyst Trish Grant, TUTCO, Inc.

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