Before You Hire, Learn the Withholding Laws of the Employee’s State 

Key Takeaways:
  • Hiring remote employees in other states can trigger new payroll, tax and workplace compliance requirements that employers need to understand before making the hire.
  • State laws vary widely, so proper registration, tax withholding and compliance with local labor rules are essential to avoid penalties and unexpected costs.
  • Working with your payroll provider early helps identify multi-state obligations and prevents costly compliance issues down the road.

 

The phenomenon of remote work has been around for many years, but it surged during the Covid-19 pandemic, when companies across the country sent employees home with laptops and embraced the new reality of Zoom meetings. 

A natural outgrowth was a rise in companies hiring remote employees across state lines. With growing talent shortages in many fields, and with businesses expanding their reach across state borders, hiring employees who could effectively work remotely from other states solved a lot of problems. 

It also created some. 

Many companies quickly found that hiring across state lines subjected them to the payroll laws, workplace rules and, in some cases, sales taxes and the corporate tax regimes of the states in which their new hires resided. As a result, some companies have pulled back on hiring remote employees in other states. 

When you do hire an employee who lives out of state, it’s important to talk to your payroll provider about it immediately. Your payroll provider will tell you what new requirements you have to properly withhold taxes and other payments from the employee’s paycheck. If you don’t remember to report it, your payroll provider should contact you as soon as they see the new employee’s information and home address come through from your HR department. An advanced payroll system will flag a new hire with an out-of-state address, enabling your provider to contact you and discuss what you need to do. 

If your company has recently hired an out-of-state employee, or is planning to do so, following are a few questions that should be asked — and answered — before you make the new hire. 

Which state’s payroll laws apply if I hire an out-of-state worker?

The payroll laws of the state where the employee resides, or where the work is actually performed, apply. State laws vary with regard to payroll withholding and workplace rules, so it’s important that your company learn what the employee’s state requires and that you follow those rules. Some states follow residency, others follow work location, and a few have convenience‑of‑the‑employer rules that can trigger unexpected tax obligations. In some cases, the employee’s role with your company may trigger certain taxes, such as sales taxes if the employee is in a sales role. 

To properly do withholding, your company will have to register with the employee’s state as an employer and make state tax payments to that state on the employee’s behalf. 

Will having an employee in another state expose my company to additional taxes?

That depends. State tax laws vary widely, and some states apply income tax nexus, unemployment insurance registration and, in some cases, sales tax nexus even if you have just one remote employee in the state. It’s important to consult your payroll provider before hiring an out-of-state employee. You may find that the registration and tax obligations are too onerous to hire out of state, or perhaps they are not. It is most important that you know what your obligations will be before making the new hire.  

What other obligations might my company have besides payroll withholding?

Many states also require employers to abide by their workplace rules. These are laws that govern such things as pay rate, overtime, meal breaks, vacation, number of hours worked, workplace breaks, paid family leave and method of providing information to employees about their rights. Some states are tougher than others when it comes to workplace rules. For example, California requires minimum paid breaks, and if the employer doesn’t provide them, the employee must be compensated for them. 

It’s important to know that many states — and even some counties and cities — have different minimum wage requirements. You need to know what they are in the jurisdiction where your new employee lives. 

What if I hire a person to do a one-day job in a neighboring state? Am I bound by that state’s withholding and workplace laws? 

Again, it depends. This is a common occurrence in areas like Kansas City, where people will go over to Missouri for a one-day temporary job. The rules on this are sometimes vague, depending on the state of residence. But if this type of work is a regular thing, even for one employee, you’re going to have to register in the receiving state. 

What happens if I hire an out-of-state employee and don’t comply with their state’s withholding and workplace laws?

This is unfortunately common. Many employers don’t realize you can’t hire employees in another state and assume you can do things according to the rules in your own state. There’s just too much variance among states. And once you realize the problem, you may be six months down the road and liable for back tax withholding and penalties. 

Reciprocity rules could give employers and employees alike more flexibility in working across state lines. Under reciprocity laws, two or more states work together to create streamlined tax and workplace compliance across borders. However, while reciprocity is more common in the Northeast, where states are smaller and cross-border employment is common, it hasn’t spread to the rest of the country. 

Questions?

Employers who are considering hiring out-of-state talent to work remotely need to educate themselves on the withholding laws, workplace rules and corporate tax laws of the state in which the new employee lives. This must be done before the employee is brought on board so everyone knows what the true costs and complexities will be. 

If your company has recently hired an out-of-state remote worker, or is planning to do so, contact an Adams Brown Payroll advisor to discuss what the tax ramifications may be.