Back to School: Multi-state Taxation for Temporary Residents

September 13, 2023
Tisha Winfield

Head of Payroll Compliance

Tisha Winfield

As many high school graduates enter their first year of college, they are faced with a host of questions and concerns. They are trying to determine which classes to take, who best to room with, and how to just survive without Mom’s Sunday dinner. Rarely does it occur to them to ask, “what’s my resident state?” Why does this matter and why on earth would they ever be asked a question like that? 

For students who are working while away from home, it is a question that must be asked by employers in order to determine where the students should be taxed. Employees who are temporarily relocated due to school, military placement, or other reasons might update their mailing address but still consider their permanent  address to be their residence. So which address should the employer use for tax purposes?

Taxation Across States

When an employee lives in one state and works in another state, the employer must consider the rules for both the resident state and work state to determine where to pay taxes. There are usually just two taxes under consideration: personal income tax that is withheld from wages (which we’ll refer to as “withholding tax”) and unemployment tax, although a  few states have paid family leave, disability and other payroll taxes that should be separately considered.

Unemployment tax is a pretty easy one to figure out. The basic rule of thumb is that an employee must pay unemployment tax in the state where they work, known as their work state. Withholding tax, on the other hand, requires you to consider where the employee lives in order to know whether to withhold taxes in the work state, resident state or both. Generally, withholding tax is determined by the work state. Residency comes into play for those states that require employers to withhold from non-residents or where reciprocity exists. (You can learn more about multi-state taxation and reciprocity in our “What is Reciprocity? Managing multi-state tax complexity in payroll’ blog post.) 

Temporary vs. Permanent Residency

Every state has their own definition of residency and typically uses words like domicile, part-year resident, and permanent home. At times, determining the state of residency for a person in a temporary living situation like college can make you feel like you are playing a logic game, using the process of elimination to figure out which state you can call home. To keep it simple, a person’s domicile is typically the state considered to be their permanent home. It is where a student returns after the college semester ends. It is where an employee returns after a business assignment. This is their permanent residency. 

Conversely, their temporary residency is just that: temporary. Be careful, though – many states have a threshold for the number of days that a person can reside  to be considered a temporary resident. The “183-Day Rule” is used by more than half of the states to determine taxation requirements for temporary residents. That rule states that a person is considered a permanent resident if they live more than 183 days in a state in a year.

States will usually make exceptions to the 183-Day Rule for non-resident students attending college in another state. Many students who go out-of-state for school will update their mailing address to either their dorm or off-campus housing. If the housing situation is temporary, even with a lease, their permanent residence is still their home state: the state where they go after the semester ends. 

So Where DO I Pay Taxes?

I’m sure you would love the answer to be “it’s up to you!” But as an employer, if you want to avoid that dreaded tax notice or correcting quarters of tax returns, take time to understand the rules of your state and the states where your employees live. And if you are in college or another temporary residence situation, make sure that you are filing taxes with your permanent address, not a temporary mailing address. It is ultimately up to you to provide the correct information, but you can find resources with your state’s Department of Revenue website or by  speaking with a tax advisor. 

Taxes are confusing, especially when you’re moving around. However, it’s incredibly important to ensure you’re staying compliant and filing correctly. Be sure to think about your tax filings as you’re heading back to school! 

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