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This article is for educational purposes and does not constitute legal, employment, or tax advice. For specific advice applicable to your business, please contact a professional.
More employees than ever across the country are working from home as many companies embrace hybrid models of in-office work or phase it out entirely. A PwC survey from January reported that 24% of business leaders said that most of their employees will work remotely a significant amount of the time moving forward, while an additional 32% said that they would likely increase the level of remote work since business performance isn’t suffering.
What does this rise in remote work mean for payroll and taxes at your business? If you decide to hire employees who will work from a remote location, you’ll need to make sure you’re ready to handle the different tax requirements across multiple jurisdictions. Here’s what you need to know to get started.
1. Determine tax obligations
Businesses typically establish nexus — or a tax presence in a state or local jurisdiction — by physically operating in a location, making the business and its employees subject to the payroll taxes and laws in that area.
Businesses can also establish nexus by:
- Owning or leasing property in the state
- Deriving income within the state
- Employing personnel in the state
So what about businesses with employees across multiple states who don’t work from one office?
Those employees are likely establishing nexus, meaning the business needs to consider the income withholding laws and state unemployment insurance premiums for each state. For example: If your consulting company and its office is based in Oregon but you have employees who work remotely in California, you would withhold income and pay state unemployment tax in California for their work. It is important to know in which state your employees work, not just reside, as the work location is what determines nexus.
There are a few additional considerations to be aware of. Some states — such as Maryland and Virginia — have reciprocity agreements in which income tax withholding is not required when a resident is living in one state and working in the other. Employees can also file for nonresident certificates for states in which they are working but not residing, making them exempt from withholding income tax in their work state.
And although the majority of cities and counties do not impose local payroll taxes, the following states do, so check on your obligations there as well.
- Alabama
- Colorado
- Delaware
- Kentucky
- Michigan
- Missouri
- New York
- Ohio
- Oregon
- Pennsylvania
- West Virginia
If you’re establishing nexus in a state due to a remote employee, make sure to register your business with that state. Through the registration process, you’ll find relevant forms, fees, and tax requirements that come with having employees in that state. For example, the payroll taxes in California can include unemployment insurance, employment training, state disability insurance, and personal income tax.
2. Learn the relevant state labor laws
Labor laws differ from state to state. Having employees across multiple states means that you’re subject to both federal labor laws as well as the state laws for the locations in which you have established nexus. And state labor laws take precedence over federal laws when they are more generous to the employee.
Some examples of this include:
- Minimum wage
- Overtime
- Paid sick and family leave
- Temporary disability
- Meal and rest breaks
Just like you’ll need to check the state income and unemployment tax rules for any states in which your employees work, you’ll also need to make sure that you’re in compliance with the state-level labor laws, even if there are no additional tax implications.
Need help determining if your out-of-state remote workers are full-time or part-time employees? Here are a few helpful resources:
- The difference between W-2 employees and 1099 contractors
- The different types of workers you can hire at your business
- Paying It Forward podcast: Getting started with a payroll software
3. Get your payroll system in order
Payroll can get more complicated as you add more employees across different states. Online software such as Square Payroll can simplify and automate much of this process. Here are some things to look for in a payroll service if you’re considering hiring remote employees:
- Can I add an additional work location in a different tax jurisdiction? Will I be automatically prompted to enter the applicable tax account information and sign the right authorization forms?
- Can I see the tax account information for all the tax jurisdictions applicable to my business?
- Can I track both employer and employee-level taxes across all jurisdictions with custom downloadable reports?
- Can my employees and I set tax settings based on the applicable jurisdictions?
- Are all of my relevant tax forms easily accessible?
Square has compiled a downloadable calendar of important dates for payroll tax deposits, wage reports, and employment tax returns to keep your eye on throughout the year.
