Employer Payroll Tax Obligations When Employees Work Out-Of-State

It’s becoming more common in today’s global environment for employees to work remotely and reside outside of the business’s resident state. Employers are obligated to understand and follow state and local laws in states where their employees work, which can be a complicated task. It’s important to remember an out-of-state employee will be considered an employee in the state in which they work, not the state in which the business is based or in which the employee lives. Below we dive into the state and unemployment tax responsibilities employers need to know.

State Taxes

Employers are expected to withhold state income tax from an employee’s wages if that employee is subject to state income tax unless noted below. Each state has its own requirements for withholding taxes for out-of-state employees.

The following states do not have state withholding tax; Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. It’s important to remember if an employee lives in a state with no withholding requirement, but commutes to a state with a requirement to withhold taxes, then taxes must be withheld for the state in which the employee works.

Reciprocal Agreements

Some states have reciprocal agreements where both states agree not to impose withholdings on employees that work in their state, but agree the employer will withhold taxes for the state in which the employee resides. In these states, employees are responsible to submit a reciprocal withholding certificate requesting their employer withhold from their resident state. Currently, Missouri does not hold any reciprocal agreements with other states, but Illinois holds agreements with Iowa, Kentucky, Michigan and Wisconsin. It’s important to research each state’s requirements.

If you have employees working in states that have state withholding tax, then the business will need to be registered with that state’s Department of Revenue “To Do Business.”  Once registered, employers will receive an employment account number so state taxes can be withheld and remitted properly.

Unemployment Taxes

In addition to applicable state withholding taxes, you will need to register your business with the state’s Department of Labor for unemployment tax withholding. Every state sets its own rates and wage base regarding unemployment tax.

Typically, new employers will be given a new employer rate based upon an industry classification. Once that employer becomes eligible for an experience rate, their rate will be calculated based on the ratio between taxes previously paid in, unemployment claims against the account and the average annual taxable payroll. Eligibility timeframe to receive an experience rate differs from state to state. Wage Base is the maximum amount of wages per employee on which an employer owes state unemployment tax. For 2019, the Missouri wage base is $12,000, and for Illinois it’s $12,960.

Local Taxes

In additional to completing state requirements, research any local tax withholding registrations that need to be completed before hiring an out-of-state employee. Check state wages and hour laws; particularly minimum wage, overtime, pay frequency and exemptions. These differ from state to state as well.

It can feel overwhelming when sorting through all the requirements of hiring an employee that will work outside the state that your business resides. Outsourcing payroll to a payroll provider is helpful in streamlining this process, keeping your business compliant and filing returns on your behalf. To see how Anders can help relieve you of the day-to-day accounting and payroll while providing a real-time snapshot of your financials, contact an Anders advisor or learn more about Anders Outsourced Accounting Services.