Resident and Nonresident Withholding Rules for Connecticut

If you're required to withhold Connecticut income tax, you must register for withholding tax with the Connecticut State Department of Revenue Services. If your business has a valid Connecticut tax registration number from the DRS, you may add withholding tax to the existing registration by logging into the Taxpayer Service Center. If your business does not have a Connecticut tax registration number, you must complete Form REG-1, Business Taxes Registration Application. Now comes the tricky part.

Nonresident tax liability

Nonresidents — those who live in another state but work in some capacity for a Connecticut-based employer — are subject to Connecticut income tax withholding if they receive wages for services rendered in Connecticut. Wages of a nonresident are not subject to Connecticut income tax withholding, however, if the wages are paid for services performed entirely outside Connecticut.

The DRS explains the rules in a series of examples:

Example #1: A resident of Massachusetts works in Connecticut for an employer that is doing business in Connecticut and in Massachusetts. The employer is required to withhold Connecticut income tax because the services are performed in Connecticut.
Example #2: A resident of New York works in New York for an employer whose main office, including the payroll department, is located in Connecticut. The employer is not required to withhold Connecticut income tax even though payment is made from a point in Connecticut, because the employee is a nonresident and performs all services outside Connecticut.
Example #3: A resident of Rhode Island works partly in Connecticut and partly in Rhode Island for an employer who is doing business in Connecticut and in Rhode Island. The employer is required to withhold Connecticut income tax on wages paid to the nonresident employee in the same proportion that the employee's wages derived from or connected with sources within Connecticut relate to the employee's total wages.

Connecticut residents working out of state

Connecticut residents are subject to Connecticut tax on all their income, regardless of where it is earned. However, should the resident work in another income-tax-imposing state, the individual is also subject to tax in that state.

Does that amount to an inescapable double tax? There's a workaround: The employer will withhold and submit tax for the state in which the individual works. The employer must also withhold Connecticut income tax if registered to do so but only to the extent that the Connecticut income tax withholding exceeds the amount required to be withheld for the state in which the services are performed.

A Connecticut resident who works in another state that imposes an income tax will be required to file a nonresident income tax return for the other state and a Connecticut resident return. The Connecticut resident will receive credit from Connecticut for income tax paid to the other state. The credit allowed is the lesser of the tax paid to the other state and the tax that Connecticut imposes on the resident's out-of-state wages. The credit is claimed on Form CT-1040, Schedule 2.

Companies may want to advise affected employees that taxpayers earning income in another state and not subject to tax withholding there should make Connecticut estimated payments. Notes the DRS: "Estimated payments may be required if the taxpayer earns significant income that is not subject to withholding in the other state (such as interest income, capital gain, or dividends)."

Sound complicated?

While there's a lot of information to consider, don't let it cause undue stress. At ConnectPay, we have an in-house tax team that can help you navigate through the complexities of Connecticut taxes. Reach out to one of our payroll representatives for more information on ways we can help your small business!