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Multi State Taxation 1. Taxpayer is incorporated in one

Multi State Taxation1. Taxpayer is...
Multi State Taxation1. Taxpayer is incorporated in one State and also has certificate of authority to work in another state. However, entity has employees and processes and files payroll tax return in other states besides the two states. The employees works for the benefit of the taxpayer from his state where employer has no legal incorporation or authority.1Q. What is the law for filing the state tax return in the states where they process payroll without having been incorporated or certificate of authority?2. How do you allocate if filing requires i.e. only payroll if no sales in those states?3. The states involved here are IL, Nebraska, NY, OH and IA?4. Are there any local taxes in OH and IA for a pass thru entity filing as S Corp or Partnership?Please provide the statutes?2.
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Answered in 21 minutes by:
9/4/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,894
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Payroll taxes (becasue these employees are residents of that state and must pay income tax there) and your DOING BUSINES in a given state are two entirely different things.

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If you are DOING BUSINESS IN the state, you'll possibly have sales tax liabilities (if you are selling goods to that state's residents or entities), and either you (if a passthrough such as partnership, sole proprietor or S-Corp) or your entity will have some income tax liability for income earned while doing business in that state (C-Corp) MAYBE S-Corp depending on the state.

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Then there's the corporate law issue, of needing to register in a state (Secretary of state's office, corporation division) if you're doing business there. (have a physical presence other than remote employees) in that state ... AND whether the employees themselves constitute presence for income or state sales tax purposes is a state by state issue.

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Customer reply replied 11 months ago
What is the law for filing the state tax return in the states where they process payroll without having been incorporated or certificate of authority?2. How do you allocate if filing requires i.e. only payroll if no sales in those states?
I understand that you can have remote employees. But please answer questions 3 and 4?
3. The states involved here are IL, Nebraska, NY, OH and IA?4. Are there any local taxes in OH and IA for a pass thru entity filing as S Corp or Partnership?Please provide the statutes?

Again, you're confusing the issues.

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State income tax liabilities come from having nexus in those states. Having payroll there ( may or may not - typically is) be one of the things that creates nexus for THAT purpose. I'm not going to look at the state income tax code for five different states ... that's far beyond he scope of this Q&A venue.

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So again, you don't allocate state income taxes to your entity if you have a payroll UNLESS that constitutes nexus FOR that particular state. Then the way you allocate is to look at the definition of SOURCE income for that state file a non-resident return, pay the tax, and then get a credit from your resident state for the taxes paid TO that other state.

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Same thing for 4, you have to have a business presence IN the state to have to pay state (or local, a subdivision of the state) INCOME taxes ,,, and remember this is a pass through, so source income is generally determined by where YOU provide the services, and shareholders pay the tax, not the S-Corp UNLESS there are separate entity taxes in the state such as a franchise tax.

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I'd be glad to dig into some of this for you, but not at this rate.

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I'd strongly recommend, however that you separate the issues and evaluate them separately

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  • State income tax (paid by the Shareholder/employees on their personal returns)
  • Any state entity tax (rare for S-Corps)
  • Payroll withholding to facilitate the employees being able to pay their own resident state income taxes
  • Payroll withholding for unemployment tax, state disability, and other state payroll purposes (again, a state by state issue, many times having to do with the size of payroll in that state)
  • Sales taxes for the state, (state SALES tax code, nexus defined differently for each state)
  • Foreign corporation filing with secretary of state, yet another definition of nexus, found in each state's corporate law
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Customer reply replied 11 months ago
OK! How much will it cost to check two states mainly OH and IN for S corp and Partnership State and Local taxes. ( Both State and Local Tax for the pass thru entity)Any links for checking for all these states for secretary of state other than NY and NJ?

See this from Ohio, regarding S-orp taxation:

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"The purpose of the law is to treat S corporations as nearly as possible as partnerships for income and franchise tax purposes so that income earned by an S corporation is taxed only in the hands of the shareholders."

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Also from Ohio:

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QUESTION:

DO THE APPORTIONMENT/ALLOCATION PROVISIONS SET FORTH IN ORC SECTIONS 5733.05(B), 5733.O51, 5747.20, 5747.21, AND 5747.22 AFFECT THE TAX COMPUTATION FOR S CORPORATION SHAREHOLDERS WHO ARE OHIO RESIDENTS?

ANSWER:

No. Since ORC Section 5733.09(B) exempts S corporations from the franchise tax, it follows that the franchise tax apportionment/allocation provisions (ORC sections 5733.05(B) and 5733.051) are not applicable. Furthermore, under Chapter 5747 an individual's federal adjusted gross income is the basis for calculating Ohio income tax.

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And finally, from Ohiio:

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QUESTION:

ARE S CORPORATION NONRESIDENT SHAREHOLDERS SUBJECT TO THE OHIO INDIVIDUAL INCOME TAX?

ANSWER:

Yes. For taxable years ending after December 31, 1985, any nonresident individual or nonresident estate whose federal taxable income includes a distributive share from an S corporation is subject to the Ohio individual income tax and must file if any of the following circumstances apply:

  • The S corporation was incorporated in Ohio for any portion of the period to which the distributive share relates, or
  • The S corporation owned or used a part or all of its capital or property in Ohio for any portion of the period to which the distributive share relates, or
  • The S corporation did business in Ohio for any portion of the period to which the distributive share relates, or
  • The S corporation held a certificate of compliance for any day within the period to which the distributive share relates.

However, Federal Public Law 86-272 may protect some nonresidents from the Ohio individual income tax if the S corporation's Ohio activities do not exceed the activities protected by Public Law 86-272.

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From Indiana:

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Nonresident Individual Filing Requirements Nonresidents meeting one or more of the following criteria are required to file a Part-Year or Full-Year Nonresident Indiana Individual Income Tax Return, Form IT-40PNR or a Form IT-40RNR if the person is a resident of a reciprocal state:

 Nonresident individuals with Indiana income from salaries, wages, commissions, sole proprietor income, and professional fees; or

 Nonresident individuals with winnings from Indiana’s riverboats, casinos, or lotteries. Nonresident partners of a partnership, nonresident members of a limited liability company treated as a partnership or an S corporation, and nonresident shareholders of an S corporation where the pass-through entity does business in Indiana are required to be a part of a composite return filed by the pass-through entity for all nonresident partners, members, or shareholders.

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Publicly traded partnerships are not required to be included as part of a composite return for a pass-through entity.

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If the individual has other Indiana source income that is not part of the composite return, the requirement to be a part of the composite return is not eliminated.

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If the individual has no other source of Indiana income, being included in the pass-through entity’s composite return will eliminate the requirement for the individual to file Form IT-40PNR.

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Customer reply replied 11 months ago
Thanks,

You're very welcome ... Your positive rating … (by using those the stars or faces on your screen, and then clicking “submit”) …is thanks enough!

That's the only way I'll be compensated by JustAnswer for the work here

...

Thank you,

Lane

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 14,894
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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