Heard It on the Hotline: Is Payroll Any Different for Employees Living and Working in Another State?

Q: Is payroll any different for employees living and working in another state?

A: With many companies looking for creative ways to retain employees and recruit new talent, implementing remote work options and hiring workers living in other states is becoming an attractive solution. However, employers should be aware of compliance considerations for out-of-state employees.

• State income tax withholding. State income tax is only paid by employees and is generally withheld based on the state in which the work is performed. Employers need to be sure the payroll system is set up to withhold taxes for the appropriate state(s) when hiring employees in other states.
• State unemployment tax. State unemployment tax is an employer- only paid tax in most states. When hiring an employee that will be working in another state, employers need to ensure they are covered for unemployment benefits in that state.
• Tax “nexus.” Nexus, also known as “sufficient legal presence,” is a legal term that refers to the requirement for companies doing business in a state to pay tax in that state. In some states, just having employees working in the state is enough to establish nexus, which may lead to additional tax compliance requirements.
• Additional state-specific or local taxes and employment laws. Some states have requirements for unemployment insurance, employer-provided paid disability benefits and/or paid family leave benefits, in addition to local municipality taxes that employers need to be aware of. Some of these benefits require employee and employer contributions. Additionally, states have varying laws regarding meal and break times, overtime, and when to issue final pay, just to name a few.

Q: How do employers know which laws are relevant for each state?

A: Some states have passed laws related to temporary remote work arrangements, and the federal government is considering legislation that would establish a uniform rule for employees working from home and in certain situations. Until a uniform law is established, employers are advised to work closely with payroll providers and tax professionals to ensure employees, and the company, are set up properly for tax compliance. It is also recommended that employers conduct an audit of long-term employees who continue to work from remote locations, to ensure the correct work locations are reported. Remember, payroll and employment laws apply to where the employee is working, not where the home office is located.

MRA members have access to the Employment Law Jurisdictional Compare Smart Chart in the CCH Compliance Library. To access this members-only resource, make sure that you are logged in and click here.

For additional information, contact the MRA 24/7 HR Hotline at 866.HR-Hotline (866.474.6854) or [email protected].