This section provides an overview of state income tax thresholds, configuration prerequisites, recommended use, and configuration steps.
Background on State Income Tax Thresholds
A mobile employee is someone who works in more than one location on an infrequent basis, including across different US states in which they’re a nonresident. States can have various thresholds for determining when mobile employees are subject to income tax as a way of reducing the administrative cost of processing smaller tax amounts.
For example, a state might impose income tax on employees who work in that state for 5 or more days of the year. If you work in that state for just 4 days of the year, you aren’t liable for income tax in that state and should instead continue to pay state income tax based on your primary work assignment.
Some states have thresholds that are based on the number of days an employee works, while others measure employee earnings. States with thresholds that measure the number of days worked can also have different definitions for the number of work hours that are considered a day of work. Moreover, depending on the state, the period during which a threshold is measured (known as the look-back period) can be yearly or quarterly.
Default Functionality for State Income Tax
In Dayforce, the default behavior for withholding state and local income tax is that the application taxes employees based on their work assignments. For example, if an employee has earnings for a secondary work assignment that is in a different state than their primary work assignment, Dayforce withholds state and local income taxes based on the address of the secondary work assignment.
Employees can also be taxed based on the taxation address of the project that they record earnings against. See Project Taxation for US Employees.
In some cases, pay groups can also be configured to suppress taxation in any jurisdiction other than the one associated with an employee's primary work assignment. For example, under this configuration, if an employee has earnings in a secondary work assignment, Dayforce still taxes the employee’s earnings based on their primary work assignment.
Functionality for Respecting State Income Tax Thresholds
Before You Begin: The multi-state tax threshold feature that is described in this entry isn’t applicable for pay groups where taxation in multiple jurisdictions is suppressed.
You can configure the application to respect income tax thresholds for various states where an employee works. When this feature is configured, and the employee has eligible earnings in a secondary work assignment or a project that is in a different state than their primary work assignment, Dayforce continues to withhold state and local income tax based on their primary work assignment. Dayforce only begins withholding state and local income tax based on their secondary work assignment or project once they meet the threshold for that state.
For example, Employee A and Employee B both have a primary work assignment in Missouri and a secondary work assignment in Kansas. Employee A has the state tax threshold feature configured, while Employee B does not.
Say that, for Kansas, you set up a state tax threshold of 5 days and a look-back period of 1 year.
Note: The threshold doesn’t count earnings or days from pay runs that were already committed before you created it. Instead, the threshold accumulates earnings or days from the point that you create it. See State Tax Threshold Configuration.
In the current pay run, both employees record 1 day of earnings at the Kansas work assignment. For Employee A, who has the state tax threshold feature configured, Dayforce continues to withhold state income tax based on the primary work assignment (Missouri). This is because the number of days that the employee worked hasn’t met the 5-day threshold for taxation. This is seen in the earning statement preview where the application withholds state and local income tax for Missouri, which is based on the address of the primary work assignment:
Because Employee B doesn’t have state tax thresholds configured, Dayforce immediately withholds tax based on the secondary work assignment (Kansas). This is seen in the following earning statement preview, where the application withholds state income tax for Kansas (in this example, there are no local income taxes for the address of the secondary work assignment, but if there were, they would also be withheld):
When employees meet a state income tax threshold, Dayforce updates the taxes for the earnings that fall within the current pay run and pays the employee appropriately. However, when there are amounts from one or more committed pay runs that contributed to the threshold, you need to run a wizard process to adjust the taxes for these amounts. See Wizard for Retroactive State Tax Threshold Adjustments.
Configuration Overview
To enable the functionality for respecting state income tax thresholds, you need to complete the following configuration tasks:
- Add Eligible Earnings to Earning Groupings
- State Tax Threshold Configuration
- Configuration of Multi-State Threshold Taxation for Eligible Employees
Recommended Use
Before You Begin: This feature is only applicable for US employees working within the US, and isn’t applicable for when US employees work outside of the US.
You should typically only assign this feature to employees who travel to different states on an infrequent basis. You shouldn’t assign this feature to employees who regularly work at two or more locations in different states. Employees who regularly work in two or more locations should be immediately taxed using the regular multi-jurisdiction taxation functionality. If the employee belongs to a pay group that has multi-jurisdiction tax suppressed, the employee should be taxed based on their primary work assignment.
This functionality is also supported for virtual employees, or employees who don’t work at a physical location in your organization. This functionality is available for hourly or salaried employees. However, conditions apply when configuring eligible earnings that are used with the auto pay feature of Dayforce. See Add Eligible Earnings to Earning Groupings.
Business Day Detail Is Required
This feature requires the source data that you provide to the Payroll module to include business dates. This is required for the application to check whether the number of days an employee worked in a state met the state tax threshold. However, business date details aren’t required for state tax thresholds that measure earning amount rather than days.
This requirement applies to data from the Workforce Management module of Dayforce, data that you import to Dayforce from external applications, or data that you enter directly in the Payroll module, such as quick entries. In the case that you enter data (for example, quick entries) in the Payroll module, there must be a separate entry for each day that the employee worked, and each entry must have the Business Date field defined.
Applicable for Income Taxes Only
The functionality for respecting state thresholds is only applicable for income taxes. The application continues to withhold state disability or unemployment taxes based on the employee's primary work assignment.
State and Local Thresholds
This functionality only measures thresholds at the state level. When a state threshold is met, the application begins to withhold income taxes for that state, which can include local income taxes depending on the tax address of the location worked. It isn’t possible to measure tax thresholds for local tax jurisdictions within states.
Configuration Prerequisites
To fully support the multi-state tax threshold feature, you must ensure that the checkboxes for the two following options in the Payroll Properties tab are cleared:
- Disable Multi Jurisdiction Taxation
- Pay Through Primary Legal Entity (This checkbox must be cleared to support cases where an employee works in a secondary work assignment or project that belongs to a different legal entity.)
You can access these properties in Pay Setup > Pay Group by selecting the pay group from the list and clicking the Payroll Properties tab.
Also, to fully support the multi-state tax threshold feature, you need to ensure that the Enforce matched pairing of Work Assignment and Legal Entity checkbox is selected in the Payroll section of the Properties tab in System Admin > Client Properties.