Maryland Tax Reciprocity

[Golden Rocket]

Maryland has a large NASA facility (Goddard) which operates in conjunction with another facility at Wallops Island, VA. The Virginia facility is on the DelMarVa and just across the state line. Assuming my client begins operating at Goddard, there will most likely be employees who are Virginia residents.

The Maryland withholding manual mentions "states with reciprocity" can have residents not subject to Maryland withholding. However, the guide does not tell which states are reciprocal, nor whether employers are required to withhold resident taxes in lieu of Maryland taxes.

Does anyone know what's happening up there with respect to this? Don't know why the withholding manual can't tell us this unless their relationships with their various neighboring states are continually in upheaval.

[Burke]

Maryland has reciprocity with Virginia.

[mactoolsix]

Here's a quick list of states with reciprocal agreements, and it even gives you the exemption form number:

http://taxes.about.com/od/statetaxes/a/reciprocal-agreements.htm

Mike

[Snaggletooth]

Another twist

Let's take the situation further. Megacorp is a Maryland employer located on the Potomoc. They have 300 employees, some 210 from Maryland and 90 from Virginia who drive across the bridge. From the discussion thus far, Maryland is not required to deduct ANY state taxes from the 90 Virginia people.

At the end of the year the 90 Virginia people get a W-2 with zero state taxes withheld. They have to come up with hundreds, maybe thousands, of dollars just to pay Virginia, who is taxing their own residents for income earned everywhere.

So these folks ask Megacorp if they will withhold Virginia state tax on the Virginia residents. Megacorp agrees to do so, although they are not required. This continues until the next round of W-2s.

The Virginia people receive W-2s showing Virginia tax withheld. But the income is Maryland source income, and the W-2s do not reconcile to the SUTA reports for Maryland. Virginia is technically not entitled to any SUTA whatsoever. It gets worse. One month the withholding collected for the Virginia people was remitted two days late, and Virginia is penalizing Megacorp. Megacorp is now involved in a payroll tax train wreck for accommodating their Virginia employees, when they had no responsibility to begin with.

Is there a better way for Megacorp to handle this?

This could be a true story as I was once involved withholding Alabama taxes from Alabama people while doing a Tennessee payroll. We did this simply as a service to the Alabama employees. State of Alabama got nasty about a trivial penalty, so we decided to stop as we had no legal responsibility to do so in the first place. To make matters worse, the Alabama people lived in the very rugged terrain of Northeast Alabama where there are no thru roads, dead-end canyons, and impassable conditions. I hope the revenuers had a pleasant journey collecting from those boys in cornbread country who didn't have the money to pay at year-end.