Payroll Tax Obligations for Out-of-State Employees

Feb 2, 2023

2022 Year-End Payroll Tax Deadline are Around the Corner!

The way businesses operate has changed dramatically in the past few years. Between advances in technology and the pandemic upending in-person work, more and more employees are working remotely—potentially in another city, another state, or even another country. As an employer, it’s essential to be aware of how these arrangements impact payroll taxes.

Withholding Income Taxes

You’re generally required to withhold federal income tax from your employees’ paychecks regardless of where they live or work. In Florida, there is no personal income tax, so employers don’t have to worry about state withholding for employees living and working in-state. However, state income tax withholding rules typically follow the laws of the state where the work is performed.

If you have employees working from a home office in another state, you may need to withhold state income taxes in their home state (assuming the employee lives in one of the 41 states that tax wages and salaries.

For example, Georgia requires employers to withhold taxes from the taxable wages of residents, whether they perform their work inside or outside of the state. It doesn’t require withholding for residents when the services are performed outside Georgia AND the other state has withholding.

So if you have an employee working from a home office in Georgia, you must withhold Georgia income tax from their wages. And if you have an employee who lives in Georgia but commutes to Florida for work, you still need to withhold Georgia income taxes because Florida doesn’t have state withholding.

Some states have reciprocal agreements, in which two states agree to allow residents to only pay state income taxes in one state (usually where the employee resides). If a reciprocal agreement applies, the employee needs to provide a non-residency certificate authorizing you to withhold state taxes in their state of residency.

Managing payroll taxes in various states is complex, and employees living or working in jurisdictions that assess local income taxes makes withholding taxes even more complicated. But this underscores the necessity of knowing where your employees are located.

State Unemployment Tax

Generally speaking, you will only have to pay unemployment taxes to the state where your employee works. So, if you have some employees working in New York and other remote workers in California, you must register with each state’s tax authority and remit taxes in both states.

In some states, unemployment taxes are employer-only taxes, meaning the business doesn’t withhold the tax from the employee’s wages. In other states, employers withhold SUTA taxes from the employee’s paycheck.

Employee Compensation Plans, Pay Stubs and Pay Frequency

If you have employees who work out of state, you may need to adjust their compensation plans, how you deliver pay stubs, and how often you run payroll to comply with different state laws.

Pay frequency

Compensation plans

The Federal minimum wage is $7.25 per hour, but states can set their own minimum wage above and beyond the federal minimum. For example, the state minimum wage in Florida is $11 per hour ($7.98 per hour for tipped employees).

Some states require employers to provide employees with meal and rest breaks—even if those employees are working remotely. Be sure to check both the state laws in the employee’s state of residence and where the employee performs services to ensure compliance. 

Pay stubs

Different states may have their own rules surrounding whether an employer needs to provide pay stubs and what is included on those pay stubs. There are generally three categories of pay stub rules:

No requirement states
In no requirement states, employers don’t have to provide pay stubs, although they may choose to.

Access states
In access states, employers must allow employees to access an electronic pay stub, but they’re not required to provide a physical copy.

Access/print states
In access/print states, employers must provide a written or printed pay stub. Employers that offer electronic pay stubs must ensure the employees can print their statements.

The payroll provider IRIS FMP provides a list of states that fall into each category.

Payday frequency

Federal law doesn’t dictate how often businesses pay their employees, but many states mandate how frequently employees receive their wages. Many require a monthly, semimonthly, biweekly or weekly minimum frequency.

The U.S. Department of Labor maintains a table of state payday requirements and notes about different pay frequency law complexities for each state. As an employer, it’s important to be aware of multi-state payroll tax implications when your employees work out of state, either temporarily or permanently. Working with a reputable payroll service provider can help ensure you withhold income tax at the proper rates in various jurisdictions. Reach out to Prithi Daswani CPA if you need help ensuring compliance—and avoiding any costly penalties or fees down the road.

Oh, one last thing before you go!

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