If a company employs people out of state, do they have to withhold income taxes in that state?

income taxes should be withheld forthe state where the employee resides. Not where he works.

The employee should be taxed in the state he/she works which will be Connecticut in this instance. This gets a little sticky since the consultant firm does technically have nexus with Connecticut but does not have an actual address to us. They will need to contact the Connecticut DOL to find out what forms they will need to complete to get the tax ID's for Connecticut. this will also go for unemployment. Connecticut does not have state disability.

If the person is on the payroll the system should have the correct withholding calc. for the state in which they reside. Some smaller states that connect to a larger state will typically pay federal to the working state and state with-holdings get sent quarterly to the residential state. Ex. I have 2 empoyees who live in PA and work in MD, Their federal taxes get paid to MD every pay week along with all the MD employees, but their state with-holding get sent in on a quarterly basis to PA. At the end of the year their w-2 reads PA in the State with-holding area while everyone else's says MD.

State taxes are withheld for the state where the employee works.