Planning to Hire Out-of-State Employees?
The shift to remote work that began in earnest during the COVID-19 pandemic has shown no signs of stopping. Many employees love the flexibility of working from home because it allows them to enjoy an improved work-life balance and be more productive on their terms. Employers also benefit from hiring remote team members because it expands their potential talent pool to out-of-state employees, allowing them to add specialized skills that enhance the services they already offer.
However, before you start recruiting out-of-state candidates, you need to consider the impact on your business from a payroll tax and regulatory compliance standpoint, including the following variables.
1. Pay Out-of-State Employees Properly
In order to be in compliance, it’s essential to understand that not every state has the same laws governing things like payroll tax, wages and overtime. For instance, investigate whether there are any specific rules concerning paycheck frequency or overtime calculations in the states where you hope to recruit remote employees.
2. Know the State-by-State Labor Laws
Besides pay, many other employment regulations vary by state. When hiring remotely, you need to abide by each out-of-state employee’s local laws, even if they differ from those in the state where you have your headquarters.
These state-specific regulations may apply to:
- Anti-harassment and anti-discrimination practices
- Unpaid leaves of absence
- Paid sick time
- Workers’ compensation insurance
- Drug testing
- Employment benefits, including health and dental insurance
- Eligibility for COBRA
In some cases, cities and counties have specific employment regulations, too, so employers who hire out of state would be wise to familiarize themselves with these hyper-local laws.
3. Register Your Business Correctly
Generally, compliance for out-of-state remote employees can be achieved in one of two ways.
You can register your business in the state where your employees live. This creates a scenario where the business must file payroll and income tax returns in the new state. If the business is a passthrough entity, then the business owner will also have to personally file in the new state.
The business classifies the employee as an employee working from the headquartered office (i.e., where the business is already registered). If the employee’s ability to work from home is an optional benefit afforded to them, it would certainly fit under the convenience of the employer rule.
Some states, including New York, have a rule that states that the employee is working out of the company’s headquartered office, no matter where they live. However, the state where the employee lives may have a conflicting rule stating that the wages are earned in their state because that is where the work is performed.
Employees tend to dislike this second option because it creates a scenario where they have to file tax returns in multiple states. Between option one and option two, either the employer or the employee will have to file tax returns in multiple states.
4. The Best of Both Worlds… At an Additional Cost
An alternative to juggling all of the above is to use a PEO as your payroll provider. PEO stands for professional employer organization. They hire your employees; all things HR and payroll compliance are handled by them. PEOs are registered in every state and are responsible for compliance. Your employees are then, technically, outsourced to you and your business.
The downside to a PEO is the additional cost, which can vary between three and ten times that of a traditional payroll provider. However, the cost tends to reduce itself when enough employees are using the pooled and negotiated group health insurance plans, which are significantly less expensive and provide more flexibility.
Your Trusted Experts
At Raines & Fischer, we are here to help you with every aspect of your small business finances, from payroll taxes to income taxes. Our partners are well-versed in business formation and compliance, so we can identify compliance and accounting issues that need attention when you start your business and as you grow. If you’re ready for a personalized approach to business services, reach out to us today.