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May 15, 2023

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

Out-of-state workers have become more common as some workplaces embrace remote work and hire employees who reside outside of the business’s resident state. This changing employment landscape requires employers to reassess their payroll tax withholding processes to ensure you are withholding the proper amount of state, local and unemployment taxes from your employees’ wages. Below we dive into the state and unemployment tax responsibilities employers need to know.

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

Multi State Payroll Tax Withholding

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. 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. 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.

Tax Withholding on Unemployment

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:

  • Alabama – $8,000
  • Alaska – $47,100
  • Arizona – $8,000
  • Arkansas – $7,000
  • California – $7,000
  • Colorado – $20,400
  • Connecticut – $15,000
  • Delaware – $14,500
  • District of Columbia – $9,000
  • Florida – $7,000
  • Georgia – $9,500
  • Hawaii – $56,700
  • Idaho – $49,900
  • Illinois – $12,960
  • Indiana – $9,500
  • Iowa – $36,100
  • Kansas – $14,000
  • Kentucky – $11,100
  • Louisiana – $7,700
  • Maine – $12,000
  • Maryland – $8,500
  • Massachusetts – $15,000
  • Michigan – $9,500
  • Minnesota – $40,000
  • Mississippi – $14,000
  • Missouri -$10,500
  • Montana – $40,500
  • Nebraska – $9,000
  • Nevada – $40,100
  • New Hampshire – $14,000
  • New Jersey – $41,100
  • New Mexico – $30,100
  • New York – $12,000
  • North Carolina – $29,600
  • North Dakota – $40,800
  • Ohio – $9,000
  • Oklahoma – $25,700
  • Oregon – $50,900
  • Pennsylvania – $10,000
  • Rhode Island -$28,200
  • South Carolina – $14,000
  • South Dakota – $15,000
  • Tennessee – $7,000
  • Texas – $9,000
  • Utah – $44,800
  • Vermont – $13,500
  • Virginia – $8,000
  • Washington – $6,700
  • West Virginia – $9,000
  • Wisconsin – $14,000
  • Wyoming – $27,700

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 more information? Check out our Employer’s Guide to Multi-State Payroll Tax Withholding for Remote Workers.

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

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