Hybrid and remote work models are becoming more common in the business world. Employees can either come into the office a couple of days a week or work from any state in the US.
However, hiring out-of-state workers comes with a unique payroll problem. With employees in different states, companies have a harder time managing payroll taxes. They must decide which state to withhold taxes from and what rules apply to those states. This means businesses must spend a lot of time learning about tax regulations in the states their employees work from.
In this post, we’ll explain how payroll taxes work for out-of-state employees and how to ensure compliance for out-of-state employees.
Understanding Payroll Taxes for Out-of-State Employees
The rule of thumb is that employees are taxed where they work. As a result, organizations must withhold payroll taxes on behalf of the states from which their employees work. This means companies must register with the tax departments of these states and remit payroll taxes to them. For instance, if your office is in New Jersey and you have an employee who works fully remotely from Maryland, you may have to register with Maryland’s tax department.
However, because payroll taxes for states aren’t centralized, there’s no one-size-fits-all solution to all payroll tax issues.
There are situations where you’ll only be expected to withhold tax for the state in which your organization is situated. So, even if you have workers outside the state, you wouldn’t be expected to file where they live. In other situations, you may be expected to withhold for more than one state, depending on the state’s regulations.
Another important part of the payroll tax is reciprocity agreements. These are usually between states close to each other, and workers under reciprocity agreements usually only owe taxes to the states they live in and not the states they work in. New Jersey and Pennsylvania have a reciprocity agreement. So, if your employee lives in Pennsylvania and works in New Jersey, you’ll only be required to withhold tax for Pennsylvania.
Best Practices to Ensure Payroll Compliance for Out-of-State Employees
Many states have penalties for failing to file and submit payroll taxes for employees who fall within their jurisdiction. For example, failure to withhold and file taxes for an employee living in New York can attract a penalty of 5% on unpaid taxes per month and up to 25% penalty in some cases. That’s why it’s important to learn about the tax laws of all states in the US or at least of all states where employees are working.
To make it easy to figure out the state you should be withholding tax for, here are some rules you can have your employees follow:
Document Where They’re Working From
Many states have a limit on the number of days a person can work in them before their employers have to submit taxes to the state. In Illinois, it’s 30 days, while in New York, it’s 14. Some states use an employee’s income threshold, while others use a combination of factors like income and time to determine when payroll tax is owed to the state. That’s why it’s important to have your employees document exactly where they are doing their work.
If they’re staying in other parts of the country for extended trips, they could cross the limits without your knowledge, and you may run into compliance issues.
Use a Compliance Calendar
A compliance calendar can help you keep track of your tax filing deadlines, compliance-related tasks, and tax filings. To make proper use of this calendar, make sure it has all federal and state deadlines as well as important local requirements.
Using a calendar tracking system, you can file on time, avoid interest charges, and prevent costly penalties. You can also use digital calendars with notifications to complete important tasks in a timely way.
Stay Informed
Regularly follow up on changes in payroll regulations to stay up to date on compliance by following regulatory agencies and subscribing to relevant newsletters. A popular one is the US Department of Labor’s Wage and Hour Newsletter, which can help you understand how to streamline your processes and avoid costly errors.
Learning about payroll tax regulations is a long process, and fully mastering it can take even longer. However, doing it hastily can lead to mistakes that can cost your business in the long run. Therefore, it’s important to take your time when you’re hiring employees across state lines to figure out what works and how it works.
Partner with a PEO
To give yourself enough time to learn about payroll tax regulations, you can partner with an IRS-Certified PEO like ABO to help handle your compliance challenges. You can also save yourself from paying penalties for failing to file when you should in the future.
How Companies Can Learn About Their Regulatory Needs
Companies can learn about payroll regulations that apply to their businesses by going through US laws on payroll compliance. They are:
- Federal Unemployment Tax Act (FUTA): This mandates organizations and employers to make contributions towards unemployment insurance on the federal level.
- Federal Insurance Contributions Act (FICA): This requires companies to contribute to Medicare and Social Security.
- Equal Pay Act: This ensures that both men and women in the same roles at work are given equal pay.
- Fair Labor Standards Act (FLSA): This law determines the lowest wage you can pay your workers as well as when you should pay overtime and child labor standards.
To learn about a state’s payroll tax law, you can visit the payroll or income tax page of that state. For instance, New Jersey has a page on employer payroll tax that explains when to withhold income tax for New Jersey residents.
Keep Control of Your Payroll with ABO!
Payroll is a complicated process, but it’s also one part of your business you need to get right. Working with a payroll tax professional like ABO can help you simplify this process. At ABO, we help companies handle taxation for out-of-state workers. We ensure you comply with local, state, and federal regulations across all 50 states in the US.
We also update you on changes in payroll regulations and give your employees adequate information on how to handle their income tax.
Reach out to ABO today to simplify your organization’s payroll!
