Managing Out-of-State Employee Payroll Taxation

The COVID-19 pandemic has created numerous payroll challenges for employers. If your organization has employees that live in a different state from which your business is located, this can result in additional challenges for payroll taxation.

Many employers during the current health crisis have updated their work-from-home policies to allow employees additional opportunities to work off-site. Changes in work-from-home policies have also allowed employers the freedom to consider hiring employees not just locally, but across the country. With these changes, it is important that all employers review their employees’ payroll taxation setup if there are multiple states involved.

Employees are generally taxed in the state in which their work is performed. The situation becomes more complicated when an employee lives in a different state from where they work, as the employee may also owe income tax to their resident state.

Employees living in a different state than the main work location can create a taxable “nexus” for your business. Nexus is the notion that a physical presence has been established in another state, to which your business can become subject to that state’s tax laws. Additionally, some states have reciprocity agreements with other states that allow residents to only withhold income tax where they live, and not where they work. Further, certain states have income tax rules on work-from-home situations that they have deemed as a convenience versus a necessity for the employee and employer. Lastly, employees working in a different state than your main office location can have an impact on employer payroll tax obligations such as Unemployment Insurance Tax.

It is important that you review any out-of-state employee’s income tax withholding and unemployment tax state with your organization’s Accountants and Tax Advisors. Applicable multi-state employees should also review their situations with the personal Accountants and/or Tax Preparers. Paypro can provide a multitude of options for out-of-state employees to withhold amounts for their resident state and/or work state depending on each employee’s unique situation. Paypro can also set up any employer-related tax code(s) based on your organization’s multi-state payroll requirements.

If you have a new hire working remotely, review if you are already registered in that employee’s resident state for income tax withholding and/or unemployment insurance tax. You can contact the Tax Department for confirmation of this fact. This should be done as soon as the employee is hired, so we can ensure any necessary new tax codes are added to our system as to not delay payroll processing.

If any new states are required to be added to your company to process payroll, or if you have questions about multi-state taxation, please do not hesitate to contact Paypro’s Tax Department at tax@payprocorp.com.