Processing and Changing State Taxes

State tax is withheld based on the city where the employee works and/or resides. When State taxes are mandatory for an employee’s duty station and residence, the duty station State takes precedence unless a reciprocal agreement is in place. States with reciprocal agreements establish that if taxes are withheld for the resident state, taxes will not be withheld for the duty station state. It is important to check state laws and regulations to determine when reciprocal agreements are applicable.

State taxes are withheld each Pay Period (PP) through payroll deduction based on the processing of a tax document; however, some taxes are computed based on a percentage of gross wages or on a specific dollar amount designated by the taxing entity and do not require the declaration of exemption information. Additionally, the Department of Treasury (Treasury) entered into an agreement with taxing entities (city, county, State, territorial, and the Republic of Panama) for mandatory tax withholding based on place of employment (e.g., duty station).

For processing purposes, the tax year usually begins in PP 25 and ends in PP 24. All taxes withheld for those inclusive PPs are reported on the Internal Revenue Service (IRS) Form W-2, Wage and Tax Statement.

Treasury Tax Withholding Agreements

Table Management System (TMGT) Table 049, NFC ALLTAX Conversion, contains the taxing authorities’ identifications (General Services Administration (GSA) location codes - State, State and city, or State and county, and the applicable ALLTAX code) used in the National Finance Center (NFC) Payroll/Personnel System (PPS). The system converts taxing authority identification codes (GSA location codes) to the applicable ALLTAX code. ALLTAX calculates taxes on the Federal, State, city, and county levels. The code identifies the specific tax computation routine.

Establishing a State Tax

State tax records are established at the time the accession personnel action and/or tax forms are processed. State taxes are entered into NFC PPS using Document Type 140, State Income Tax Certificate. Employees should complete the applicable tax form(s) to authorize withholding and claim exemptions, as applicable. Employees may also authorize an amount withheld from salary each PP in addition to the amount automatically withheld in accordance with the State tax income tax formula.

The rules for establishing State tax withholdings in NFC PPS are:

• When the duty station has a mandatory tax withholding agreement and a tax certificate is not processed, NFC PPS withholds at the highest taxable rate. To view the tax formulas, go to the HR and Payroll Clients page from the MyNFC drop-down menu on the NFC Home page. Select the Publications tab and select Taxes from the Publications Library section to launch the tax map. Select the desired State from the map provided for the formula.
• A new tax certificate may be processed at any time to change an employee’s tax information.
• A new tax certificate must be processed when the employee changes residence city/county/State and/or duty station to another city/county/State because all previous exemptions, additional withholdings, etc., are removed and must be reprocessed, if applicable.
• When an employee transfers from one Agency to another within the NFC PPS system, the taxes deducted year to date (YTD) are carried forward to prevent overpayment of taxes. A new income tax certificate does not need to be processed for employees reassigned to another Agency serviced by NFC.
• When an employee transfers into an Agency serviced by NFC PPS from an Agency serviced by a different payroll office, the Agency must enter the YTD tax withholding data from the prior payroll office using Document Type 030, Master File Change. The employee must submit a new tax certificate at the time the accession action is processed.

State Tax Withheld Based on Federal Tax of Annual Wages

A State tax withholding certificate is not processed when the State income tax formula is based on a percentage of Federal income tax, Federal exemption status, or a percentage of annual wages. When the State tax withholding is based on the Federal withholding and an IRS Form W-4 is not processed, Federal and State income taxes are automatically withheld at the rate of single with zero exemptions until a W-4 is processed.

Agreements Between States

The employee must reside in a designated State to be exempt from the mandatory withholding provisions of the duty station State. Enter the duty station State tax document to waive liability before entering the residence State tax document. When an employee’s duty station changes, the certificate of non-residence in effect becomes void, and a new certificate is required for the new duty station State (if applicable).

Military Spouses Residency Relief Act

The Military Spouses Residency Relief Act (MSRRA) (Public Law 111-97) was signed into law on November 11, 2009. MSRRA allows the spouses of military personnel to withhold State and local taxes based on an address other than the duty station or residence address documented in the PPS.

To meet the requirements for MSRRA, NFC established Special Employment Programs Code MS (Military Spouse Special Tax Processing) to identify an employee who is the spouse of a military person and meets the requirements for withholding State and local taxes based on an address other than the duty station or residence address. Special Employment Programs Code MS allows NFC to accept a State tax document for any State, even if it is not the employee's duty station or address documented in PPS.

For additional information refer to the processing tip Establishing State Taxes to Comply with the Military Spouse Residency Relief Act.

Voluntary Withholding of State Taxes AKA Dual State Taxes

Several taxing entities without agreements with the Secretary of the Treasury are established in the database for voluntary dual State tax withholding. In addition, some employees may wish to voluntarily withhold taxes for both their duty station and residence States. Tax data must be processed for these entities for taxes to be withheld.

When State income tax is currently being withheld based on the duty station and a State tax form is entered to begin withholding for the residence State, the document suspends with a message indicating the document results in dual State tax deductions. To release the document, select C on the Override Code drop-down.

Voluntary withholding is based on residence. An employee may voluntarily elect to pay tax based on residence if:

• The residence city, county, or State is established in TMGT.
• The mandatory duty station tax is waived (if allowed).
• The residence tax locality agrees with the residence tax locality of the duty station.

Voluntary State tax withholding stops when:

• An employee's duty station State changes.
• The State revokes its tax withholding law.
• An exemption from withholding certificate is processed.
• A cancellation of voluntary withholding is processed.

Verifying State Tax Data

The following resources may be used to verify data on Document Type 140, State Income Tax Certificate:

• Information/Research Inquiry System (IRIS) Program IR105, State Tax.
• Payroll/Personnel Inquiry System (PINQ) Program PQ32, Payroll Listing.
• PINQ Program PQ64, PACS State Tax.
• The Listing of Personnel Error Messages Report listed as Document Type 140, State Income Tax Certificate.
• TMGT Table 009, State Tax Name and Address.
• TMGT Table 049, NFC ALLTAX Conversion.
• TMGT Table 067, Tax Entities Report Frequencies.
• TMGT Table 068, NFC Pay Period Cutoff for Tax Reports.
• Form AD-334, Statement of Earnings and Leave.

Note: To verify a State tax cancelation applied to the database, access IRIS Program IR105. A 0 (No) displays in the Duty Station Status field and the Withholding State Code/Name field on IRIS Program IR105 is blank.