Hiring remote employees across multiple states can create significant payroll tax obligations for employers. Many employers now manage payroll for remote employees working in another state. Businesses with distributed teams must determine where payroll taxes should be withheld, how unemployment taxes apply and whether state benefit programs require additional payroll deductions.

Key Takeaways:

• Employers are obligated to withhold state income tax from employee wages, unless the employee is not subject to state income tax
• Nine states do not require employers to withhold state taxes, see the list below
• Certain states have reciprocal agreements, meaning that an employee who lives in one state but works in another will only have taxes withheld for the state in which they live

Do Employers Have to Pay Payroll Taxes for Employees Working in Another State?

Often, yes. When an employee performs work in a state where the employer is not based, the employer may still be required to withhold payroll taxes and state unemployment insurance (SUI) taxes/contributions. Payroll tax obligations are generally determined by where the employee performs their work rather than where the employer’s office is located.

This means employers with remote employees or staff working across state lines often need to comply with payroll tax rules in multiple states. Requirements vary by state, which is why employers should review withholding, unemployment tax and local tax obligations whenever employees work outside their primary business location.

Employer Payroll Tax Obligations for Out-of-State Employees

When employees work outside the state where a company is headquartered, employers must determine where payroll taxes should be withheld and reported. In many cases, employers are required to register with the state where the employee performs work and withhold income taxes for that jurisdiction. Employers may also need to register for unemployment insurance and comply with state wage and labor laws.

Because each state sets its own payroll tax rules, employers with distributed teams often face complex multi-state payroll tax compliance requirements. Understanding where employees perform work — and which state laws apply — is the first step toward ensuring payroll tax obligations are handled correctly.

Payroll Taxes for Employees Working in Multiple States

Employers are generally required to withhold state income tax from an employee’s wages when that employee performs work in a state that imposes income tax. For employees working in multiple states or working remotely from another state, determining where payroll taxes should be withheld can become complicated. It’s important to remember that withholding is generally determined by the state in which the employee performs their work, not the state in which the business is based—though residency rules and reciprocity agreements can change the outcome. Each state has its own requirements for withholding taxes for out-of-state employees. The following states do not have state withholding tax requirements:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• 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 Between States Affect Withholding Rules

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. 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 withholding account number so state taxes can be withheld and remitted properly.

Example: Employer Based in One State With a Remote Employee in Another

For example, if a company based in Maryland hires a remote employee who performs work from New Jersey, the employer may need to register for payroll withholding in New Jersey and withhold state income taxes there. In addition, the business may need to register for New Jersey unemployment insurance depending on how the employee’s work is structured.

Situations like this have become increasingly common as employers expand remote hiring across state lines, making it important to review payroll tax requirements whenever employees work outside the employer’s primary state.

State Unemployment Tax Obligations for Multi-State Employers

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.

The 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 2023, according to the American Payroll Association, state unemployment insurance taxable Wage Bases are as follows:

Each state has its own rules about what deems you an “employer in that state, and therefore whether you have responsibility for unemployment in the state where the employee remotely works. There are circumstances regarding whether an employee is working in that state permanently or temporarily. Usually, an employer must report wages in the state where the employee conducts their work.

Local Tax Withholding

In addition 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 where your business resides. Anders State and Local Tax team has experience working with businesses and state authorities to remedy improper state tax withholding for multi-state employers. Learn more about how we can ensure compliance with state payroll tax withholding requirements and the associated fees by contacting Anders below.

Looking for a deeper operational guide? Read our Employer’s Guide to Multi-State Payroll Tax Withholding for Remote Workers.

Julie M. Poeling, Business Accounting Manager, contributed to this article.