It’s already difficult to manage payroll for a small business, but it can get even trickier if you have employees who work out of state. Whether you have remote employees, live near a border, or have any other reason for an employee to complete their work in a different state, there are certain rules set by the Department of Labor (DOL) and other federal and state agencies that you need to follow when handling payroll for those workers.
Who is Considered an Out-of-State Employee?
Identifying an out-of-state employee is pretty simple – it’s an individual whose primary work is completed outside of the state where your business is registered. However, the tax implications of out-of-state employees aren’t quite so simple.
An employee’s resident state is where that person makes their permanent home. On the flip side, a nonresident state is any state where that employee commutes to or spends some time in for work. While it may be easy to assume that out-of-state employees live and work remotely in their resident state, that’s not necessarily the case. Any of the following workers count as an out-of-state employee.
- Someone who lives and works in a state outside of your business’ registered state
- Someone who lives in the same state as your business, but travels to and works in another
- Someone who lives outside of your business’ state, but travels to a separate state and works there
For example, let’s say your business is registered in Ohio and you have an employee who lives and works remotely in Florida. That individual is an out-of-state employee. However, let’s pretend that the employee lives right by the Ohio border and rents office space in the Buckeye state. In this case, the employee would technically be an in-state employee since he or she completes his or her primary work in Ohio, despite it not being the resident state. There’s also the case that if your employee lives in Ohio, but travels to and works in Michigan, that person is an out-of-state employee.
In general, an employee whose primary work is not in your business’ state is essentially an out-of-state worker. This makes it important to ask your employer where they perform the majority of their work – the answer will play a big role come tax time.
Key Differences When Handling Payroll for Out-of-State Employees
Once you’ve identified which of your employees qualify as out-of-state workers, it’s time to handle your payroll. When it comes to out-of-state employees, there are three big steps you need to take.
Register with any necessary state tax agencies
While your business is already registered in your home state, that’s not enough for employees in other states. You’ll need to register your business with the tax agency of every state where any official employees complete their primary work, whether that’s one additional state or several.
You’ll also need to check with that tax agency to see if you’ll also need to register with that state’s labor and unemployment agency. If not, that state government may come calling at some point, and they won’t be pleased.
Follow the local laws of applicable states
While you may understand all of your state’s laws regarding payroll policies, outside regulations can create a whole new challenge. There are several different pay and labor laws that can impact your out-of-state employees’ paychecks. As such, it’s important to make sure you look into several different areas to see if you need to modify your payroll.
Minimum wage
If you have out-of-state employees who make minimum wage, you’ll need to make sure that you don’t just follow your own state’s rate. For example, an out-of-state employee who works in Michigan is entitled to $9.65 an hour, so that person won’t be pleased if you pay them at Ohio’s $8.70 rate.
Certain states also have special rules aside from flat rates or have plans to escalate rates over time. South Carolina has no state minimum wage law, but employers that fall under the Fair Labor Standards Act are required to use the federal rate of $7.25. New Jersey plans to increase its rate each year until it hits $15 per hour in 2026. If you have an employee in another state, you’ll need to pay close attention to the DOL’s updated list of minimum wage laws to make sure you don’t miss a special rule or accidentally get caught paying an old rate.
Pay frequency
Depending on where your employee works, he or she may have a different payday than the workers in your state. Certain states have set requirements on how often you should pay employees, while others give owners leeway into setting paydays, whether it’s weekly, monthly, or some other option. The DOL tracks each state’s payday requirements, including if employers need to provide written notice or seek permission for certain pay periods.
Overtime
There are states that simply observe the federal overtime rules, but others apply their own laws that can add an extra wrinkle to your payroll. Some states like California have daily overtime laws that kick in when employees work more than 12 hours in a day. Others may set different weekly hour requirements. In general, the DOL notes that if state and federal rules conflict with each other “the employee is entitled to overtime according to the higher standard.” Regardless, you’ll want to check with any applicable state labor office to get a definitive answer on your obligations.
Workers’ compensation and disability insurance
Like the other considerations, you’ll need to check with your employee’s state to see if it has any notable differences in purchasing workers’ compensation. Texas is the only state where workers’ compensation is optional, but other states can have some disparities from your local requirements. Some states, such as Ohio, require you to purchase insurance from a monopolistic state fund. Other states ramp up the penalties for not carrying workers’ compensation. Either way, check in with the official state organization to make sure your out-of-state employees are covered.
There are also some locations that add some payroll requirements for disability insurance. Five total states require you to withhold state disability insurance from paychecks, which means you need to factor that into your calculations if you have an employee who works in the following places.
- California
- Hawaii
- New Jersey
- New York
- Hawaii
Paycheck delivery
While the Fair Labor Standards Act (FLSA) requires that employers keep accurate records of every employee’s hours and wages, it does not require you to provide those employees with pay stubs. However, certain states have different standards for how employers need to deliver pay information. Depending on location, states may:
- Have no requirements about providing pay information statements to employees.
- Require employers to provide or furnish a statement of pay information that each employee can at least access electronically. The majority of states fall under this group.
- Require employers to provide written or printed pay statements and give employees the ability to print electronic statements.
- Give employees a chance to opt out of a paperless pay program and receive paper pay stubs.
- Allow employees to opt-in to a paperless pay system if an employer wishes to offer one.
In addition to paystubs, states can have differing rules on when you need to provide an employee’s final paycheck when he or she leaves or is terminated. As such, you’ll want to look up those terms if an out-of-state employee is no longer with your company.
Withhold taxes based on your employee’s work location
In addition to workers’ compensation, overtime, and other key considerations, withholding taxes plays a major part in managing payroll. Depending on where employees work, you may need to withhold state and local income taxes from their paychecks if it’s required in your employee’s city or county.
As you’d expect, your withholding responsibilities depend on where your employee works. Seven states don’t have income taxes or only have them on dividend and interest income. As such, you wouldn’t need to withhold income taxes for an out-of-state employee who works in Florida or any of the other six states. As a bonus, you also won't need to register with the tax agencies for states where you don’t withhold income tax.
There are also 16 states that require employers to withhold local taxes in addition to income taxes. As such, you’ll need to research and withhold both taxes from paycheck based on that state’s rates.
Reciprocal states
If that doesn’t sound tricky enough, some states have tax reciprocity. Essentially, reciprocal states have agreements in place with other specific states that allow employers to withhold taxes based on the state of residence instead of where an employee works. As such, an employee can give you a reciprocal withholding certificate if they wish to request you withhold taxes for their home state instead of the work state if both locations have an agreement in place.
Here’s a breakdown of existing reciprocal tax agreements, listed by an employee’s home state in bold. (Note: People who work in the District of Columbia can live in any state)
- Illinois – Iowa, Kentucky, Michigan, Wisconsin
- Indiana – Kentucky, Michigan, Ohio, Pennsylvania
- Iowa – Illinois
- Kentucky – Illinois, Indiana, Michigan, Ohio, Wisconsin, West Virginia
- Maryland – District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
- Michigan – Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin
- Minnesota – Michigan, North Dakota
- Montana – North Dakota
- New Jersey – Pennsylvania
- North Dakota – Minnesota, Montana
- Pennsylvania – Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia
- Ohio – Indiana, Kentucky, Michigan, Pennsylvania, West Virginia
- Virginia – District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
- Wisconsin – Illinois, Indiana, Kentucky, Michigan
- West Virginia – Kentucky, Maryland, Ohio, Pennsylvania
Feeling Overwhelmed? Simplify Your Payroll with GMS
Whether you need to plan for out-of-state employees or simply need to manage payroll for your in-state office, the process is a lot of hard work. There’s also the issue that even after investing a lot of time in payroll, a simple mistake or two can lead to upset employees and non-compliance issues with various federal and state agencies.
If you’re fed up with the time and stress involved with managing payroll, GMS can help. As a PEO, our experts can manage your company’s payroll, decreasing your workload and liabilities so you can focus on growing your business instead of calculating paycheck deductions.
Ready to free up your calendar while streamlining critical HR functions? Contact us today to talk to one of our experts about your company’s HR needs.