Facing huge budget deficits, Minnesota and Wisconsin have ended their reciprocity agreement regarding state income tax as of January 1, 2010. Now employers in those states will be required to withhold not only the work state SIT but, to the extent that resident SIT withholding exceeds the nonresident tax, SIT for the resident state. Residents of either state who work in the other will be required to file SIT returns in—and pay taxes to—both states.

What does this mean for you as an employer? Many other states facing their own budget issues could end reciprocity agreements in the belief of generating more income. If you have nonresident employees working in any state, no matter how inconsequential the amount of time they spend in that state, watch for new nonresident SIT withholding and filing obligations by monitoring state Web sites in states where your employees work and in states where employees live. Many states are auditing firms that fail to withhold nonresident SIT, and liabilities and penalties can be substantial.

According to the Federation of Tax Administrators’ website, only seven states have no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee only tax dividends and interest income.