In the trucking business, dealing with payroll can be tricky. One part of this is something called “courtesy withholding” for state income tax. This means that a company holds back state taxes for a driver’s home state, even if the company is in a different state. While this might seem like a nice way to keep drivers happy, there are some challenges and risks that come with this practice.
Disclaimer: This article is for general information only. Make sure to talk to a tax professional or your lawyer before making any decisions to ensure you are following local laws.
What is Courtesy Withholding for Trucking Companies?
Courtesy withholding happens when a worker asks their company to hold back state taxes for their home state, even if they work in another state. Truck drivers travel to many states, but they are counted as employees in the state where their company is based. For trucking companies with drivers from different states, courtesy withholding might seem like a good way to keep drivers happy, and it can help. But meeting one driver’s request can cause a chain reaction of problems for both the company and the other employees.
What Are the Downsides of Courtesy Withholding?
Let’s look at an example to show the downside of withholding state taxes for workers from different states. Imagine you run a trucking company based in Michigan, and you’ve been holding back Michigan state tax for your W-2 employees. This is the right thing to do. Now, you hire Joe, a new driver from Indiana. Joe asks you to hold back Indiana state tax for him because his last employer did that. Keeping drivers is important, so you agree! You then register your company with Indiana for withholding tax.
But the story doesn’t stop there. A few weeks later, other drivers hear that you’re withholding Indiana state tax for Joe. Here’s where things get tricky—Bob, another driver, finds out, and he just moved to Kentucky. Not wanting Bob to get upset and leave, you decide to withhold Kentucky state tax for him too.
Now, you’re stuck in a never-ending cycle. Your trucking company is handling state tax withholdings for several states. Now, you have three different state tax authorities that could start checking into your company. Even if you’re doing everything right, it means more people looking into your business.
The Challenges and Risks of Courtesy Withholding for Trucking Companies
Even if you’re trying to do the right thing, courtesy withholding can cause problems you didn’t expect. Handling tax withholdings for different states makes your payroll more complicated. State tax offices might start looking closely at what you’re doing, even if you’re following the rules, just because things are more complex. Also, if an employee leaves, there’s a chance you might forget to stop or file zero for the extra state tax withholdings, which could lead to fines and other issues with compliance.
What Should You Do?
We suggest withholding taxes only in the states where you are legally required to do so. These are states where you have a physical presence, like a building, office, or terminal. This keeps your payroll process simple and reduces confusion while giving your company a clear policy.
Employees who live in different states should talk to a tax expert who can give advice based on their personal situation. Everyone’s finances are different, and a tax expert can help them figure out the best way to handle state tax withholdings.
In the end, even though courtesy withholding might seem like a nice thing to do, the complications and possible problems usually outweigh the benefits. Keeping a clear and simple payroll process can help things run more smoothly and keep employees happy, while also reducing unnecessary risks for your trucking company.
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, she was an assistant store director.