2020 has fundamentally changed how jobs are performed, and where people are getting their work done. The work location you enter for a new hire depends on several things: where your employees decide to live and work, how long they’ll live or work in a given state, if the states have reciprocity, and a variety of other factors.
Understanding these dependencies can sometimes feel like a challenge, but we’re here to help.
Employee work location
In most cases, you’re required to withhold taxes in the state where your employee physically works—which can either be their resident or non-resident state.
- Resident state: This is your worker’s permanent home address.
- Non-resident state: This is any state that your worker commutes to for work or works in for a short amount of time, but it’s not their permanent home.
Preparation for hiring a remote worker
The golden rule is that taxes are owed in the place where work is done. When preparing to hire a remote worker in a new state, you’ll usually need to register with at least one state tax agency (and possibly others)—so it’s important to understand your withholding obligations in that state.
COVID-19 reminder: the federal government hasn’t given guidance on how to treat temporary moves due to COVID. Accordingly, each state (and sometimes city) is handling them as they see fit. Learn which states are relaxing the rules so you don’t need to withhold payroll taxes for employees temporarily working in a new state as a result of COVID.
For employees who work and live out of state
State laws vary. If you have employees working in another state, you’ll need to understand that state’s legislation to determine if an individual’s “work” address should be listed there, or you can consult a legal or tax advisor who can help you.
For employees who live out of state, but work in your business’ state(s)
Here too, the golden rule is that taxes are owed to the state where the work is done. But—some states have agreements that allow employees who work in one state and live in another to only pay income taxes to their state of residency (aka their home state). This is called a reciprocal agreement. Whether the states you’re dealing with have these agreements could affect an employee’s income tax withholdings.
Labor laws and compliance in the new state
When hiring a remote employee, you’ll need to follow the pay and labor laws in the state where they are—which could differ from the laws in the state where your business is located.
Here are some considerations to familiarize yourself with for each employee that works in another state, so you stay compliant:
- Minimum wage: you’ll need to pay your workers at or above the highest minimum wage.
- Overtime: learn when you’ll need to pay overtime to your employees and at what premium rate (e.g. 1.5x the regular rate).
- Some employees are exempt from overtime but state and local laws vary, so be sure to check when the employee will be eligible for overtime and how much to pay him or her.
- Pay frequency: determine payday (frequency) requirements in the new state.
- Some states only allow semi-weekly or monthly payroll, while others also allow weekly and bi-weekly payroll. Additionally, some states have payday requirements based on the work your employee does.
- If your pre-existing payroll frequency isn’t allowed in a remote worker’s state, you’ll need to follow the payday laws in that state.
- Final paycheck rules: there are state-specific rules about how a regular paycheck or final paycheck should be delivered–you’ll need to deliver your employee’s final paycheck within the timeframe dictated by their state laws and this timeframe may vary if your employee quits or is terminated.
- Meal and rest breaks: every state has laws about how many paid and unpaid breaks you need to provide employees. Be sure you communicate these laws to your employees and provide the mandatory break periods.
- Disability insurance: withholding money from employee’s paychecks for state disability insurance is required in five states–California, New Jersey, Rhode Island, Hawaii and New York.
- Workers’ Compensation Insurance: requirements can vary by state, industry, and the size of your company.
Hiring remote contractors
While hiring a remote contractor is generally less complicated than hiring a remote employee, misclassifying an employee as a contractor could lead to serious tax penalties. Before hiring a new teammate, learn more on the difference between employees and contractors.
Looking for a great Payroll provider? Let us recommend Gusto to you. We use Gusto and recommend them because they are a company that we have found amazing and trustworthy!
Gusto is a company that provides a cloud-based payroll, benefits, and human resource management software for businesses. Gusto will handle payments to employees and contractors and every time you run payroll they will calculate your taxes and file them with the right government agencies.
As part of the core payroll product, Gusto offers employee onboarding (work authorization forms, direct deposit forms, employee information aggregation). Separately, Gusto offers employee health insurance, dental insurance, and vision insurance enrollment and administration. Learn more about Gusto.
As always, should you have any questions or concerns please feel free to contact us.