Getting Out-of-state Remote Workers on Payroll
If you're running your own payroll, you've probably established checks and balances to help make sure your business stays in compliance and you're paying your employee taxes correctly.
But if you're growing or bringing employees back on board, things can get more complicated, especially if you are expanding your workforce to include employees working out of state. That's because no two states are alike when it comes to payroll tax laws, rules, and regulations. Here are some of the key factors you'll need to consider if you are preparing to hire out-of-state remote workers.
Types of remote workers
You will have various tax liabilities depending on the types of workers you have. This includes which taxes you must withhold and pay, any mandated benefits you are required to provide, and obligations for paying overtime, among others.
Remote workers will fall into either of the following categories:
- Employees: The employer is responsible for withholding payroll taxes from an employee's paycheck and paying a portion of their payroll taxes.
- Independent contractors: The employer doesn't withhold payroll taxes from independent contractors' earnings. Contractors are responsible for handling their own taxes.
Remember that misclassifying an employee as an independent contractor could lead to tax penalties.
Taxes for out-of-state remote employees
Given that different states have their own tax laws, you may have additional tax obligations with out-of-state remote workers. With this in mind, pay careful attention to your responsibilities for:
- State income taxes
- State unemployment taxes
- Local income taxes
State income taxes
State income taxes vary from state to state, so the withholding rates you establish for employee paychecks will vary, depending on where your remote employees reside. You'll need to make sure that you are using the right tables for every state where you have employees, and you'll need to stay on top of these tables every time they change.
In addition, each state has its own taxing authority. This means you need to register with every state where you have employees, going through the necessary steps and fees to get an ID number so you can withhold and remit taxes.
You will also need to follow each state's unique rules for making deposits — the timing of these deposits, the electronic system where these deposits are made, and any supporting filing and forms.
To recap, if you have out-of-state remote workers, remember to complete the following to satisfy state income tax requirements:
- Register with every state where you have employees: You may also need to do the same with local tax agencies.
- Withhold appropriate income taxes and file any necessary paperwork: Tax forms, filing dates, and where you send payments will differ based on the state.
State unemployment taxes
Just as every state has its own tax rates and laws, each state also has its own State Unemployment Tax (SUTA) rules and regulations.
Typically, SUTA is typically paid to the state where the employee works, so if you have multi-state payroll, you will need to pay these taxes to each of these states. Each state sets its own rates, its own wage base, and requires you to register for an account with its own state unemployment agency. Of course, as with everything else related to taxes, these rates and rules will often change year-to-year and state-to-state. Of course, there are exceptions. For instance, employees in Alaska, New Jersey, and Pennsylvania are subject to their own taxes, which employers must withhold and remit on their behalf.
Local income taxes
There are pockets of localities throughout many states that require additional income taxes to be withheld and remitted.
These local income taxes add another wrinkle to the multi-state payroll challenge. Like each state, these localities each have their own rules, regulations, and requirements for handling withholding, deposits, and filings. All of these need to be addressed in an accurate and timely manner.
Reciprocity rules and forms
Some states have reciprocal agreements among each other. These agreements allow residents of one state to work in another state without having to file a nonresident tax return. This can greatly simplify tax time for employees.
Each state has its own reciprocal agreements with a few different states, and each state has its own form for employers to respond to and adjust withholding accordingly. For instance, Arizona has reciprocity with California, Indiana, Oregon, and Virginia, and a Withholding Exemption Certificate (Form WEC) is filed with employers to avoid withholding.
How to set up reciprocal withholding
Your employee needs to request and complete a withholding exemption or non-residency certificate from their state's tax agency to excuse them from tax withholding in the state where your business is located. Once they've completed the form and submitted it to you, maintain it in your records. You don't have to submit the certificate. If you work with a payroll provider, let them know that your employee has completed a certificate. This will give your provider the go-ahead to withhold the correct amount in the employee's state.
Don’t forget employment laws
Employers must also be aware of the applicable employment laws that impact their employees including but not limited to minimum wage, employee leave, overtime, and pay frequency. As with taxes, where the employee is working impacts which laws and regulations are applicable.
When it comes to running multi-state payroll, putting the correct in-house systems in place is hard enough — but keeping up with all of the different state rules, rates, and forms can get overwhelming quickly. These many complications can quickly lead to avoidable errors, costly mistakes, and a great deal of wasted time.
Instead, many small businesses choose to hand their payroll administration off to an expert service provider once they run into a multi-state employee situation. If you decide to go this route, you can re-channel your time and effort that was previously spent on payroll tasks, and put it toward growing your business instead.