What is Courtesy Withholding For State Income Tax?

In the trucking industry, navigating the complex payroll environment frequently presents challenges that require thoughtful consideration. One such aspect is courtesy withholding for state income tax, a practice where an employer withholds state taxes for an employee’s home state, even if it’s different from the company’s location. While this might seem like a considerate move to retain drivers, it’s worth exploring the complexities and potential pitfalls associated with this approach.

What is Courtesy Withholding?

Courtesy withholding is implemented when an employee requests their employer to withhold state taxes for their home state, even if they work in a different state. Yes, truck drivers work in lots of different states, but they are considered employees in the state their employer operates in. For trucking companies with drivers coming from various states, courtesy withholding might appear as a solution to retain drivers, and it can be. However, by accommodating one drivers needs, it can trigger a domino effect of complications for both the employer and the employees.

The Dilemma of Withholding for Different States:

Let’s delve into a scenario to illustrate the dilemma of withholding state taxes for employees from different states. Imagine you’re an employer of a trucking company that is based in Michigan, and you’ve been withholding Michigan state tax for your W-2 employees. This is a correct procedure. Now, you hire Joe, a new driver, who’s from Indiana. Joe requests that you withhold Indiana state tax for him, because his previous employer did that for him. Driver retention is key, so you say sure! So you register your company with Indiana for withholding tax.

However, the story doesn’t end there. A few weeks later, word spreads that you’re withholding Indiana state tax for Joe. But, here’s the twist—Bob, another employee, catches wind of this and he has just relocated to Kentucky. Worried about inconsistencies, you decide to withhold Kentucky state tax for Bob to avoid him getting mad and leaving your company.

You now have an endless cycle. Suddenly, your trucking company is juggling multiple state tax withholdings. And now you have three state tax authorities that can go poking around your trucking company. Even if you aren’t doing anything wrong, it’s a lot more eyes on your company.

The Complexities and Consequences:

Even if your intentions are noble, courtesy withholding can lead to unintended consequences. Managing tax withholdings for multiple states adds complexity to your payroll process. Additionally, state tax authorities may scrutinize your practices, even if you’re following the law, simply due to the increased complexity. Moreover, if a situation arises where an employee leaves your company, there’s a risk of forgetting to discontinue or file zeros for the extra state tax withholdings, leading to potential penalties and compliance issues.

What Should You Do?

We recommend only withholding the states you are legally required to withhold. Those states would be any state you have a physical presence in. i.e. a building, office, or terminal. This not only keeps things streamlined for payroll and lessens confusion, but it’s also a clear policy for your company.

For employees living in different states, it’s advisable for them to consult with a tax professional who can provide personalized guidance based on their specific circumstances. Each individual’s financial situation is unique, and tax professionals can help them navigate the best course of action when it comes to state tax withholdings.

Bottom Line:

In the end, while courtesy withholding might seem like a kind gesture, the complexities and potential consequences often outweigh the benefits. Prioritizing a clear and consistent payroll process can contribute to smoother operations and happier employees while mitigating unnecessary risks for your trucking company.

Disclaimer: This article is meant to be a general overview. Consult a tax professional or your attorney before you make any decisions to ensure that you are following local laws.

Contact us today to learn more about our trucking payroll services and request a quote for your company. Take the first step towards efficient and accurate payroll management. Click the buttons to the side.

Written by Harley Houlden

Harley joined Superior Trucking Payroll Service in early 2019. Her main roles are Inbound sales, Implementation, and marketing. She loves the work atmosphere.

“It feels like everyone here is a family. Even when we add someone new to the team, they just meld right in.”

Before joining STPS she worked at a local chain grocery store starting in 2013 as a cashier and by the time she left in 2019 was an assistant store director.

What is Courtesy Withholding For State Income Tax?