In a previous article on income taxes when employees work out of state, we explained that many states have reciprocal payroll tax agreements that prevent workers from having to file and pay income taxes in two states, the state where they reside and the state where they work.

But what does that mean for small business employers?

As a business owner, you are responsible for withholding payroll taxes for all of your employees for any applicable federal, state or local tax agencies.

But what if you have employees who live in a state that is different from the state your business in?

So, for example, if you have an employee who works at your business in Pennsylvania but that employee lives in New Jersey, should you withhold payroll taxes for Pennsylvania or withhold payroll taxes for New Jersey?

Such multi-state taxation issues are complex, but reciprocal tax agreements between states generally say that employers don't have to withhold the tax for the state where the employee lives.

In other words, for example, an Illinois business employing a Wisconsin resident would not be required to withhold Wisconsin payroll taxes for that particular employee.

However, many employers will withhold payroll taxes for the employee's state of residence in order to provide a convenience to the employee.

If you are dealing with these kinds of payroll tax issues, we would strongly recommend that you use a full-service payroll service, such as SurePayroll, ADP or Paychex. They have on-staff experts who can make sure that you are handling interstate payroll withholding appropriately.

If you insist on processing payroll on your own or with payroll software of some kind, then make sure you ask your state revenue agency as to whether you need to withhold for employees who live out-of-state.

Payroll tax laws vary by state and are complex. Seek the advice of an expert to make sure you've got it right.