With work-from-home and remote work arrangements becoming more and more commonplace, many employers may find their employees performing their work from different locations. Not really a big deal if the employee lives and works in the same city as the company, but what happens if they decide to move to a different city or state? Having an employee who actively performs work in a different state could result in some challenges for your payroll team depending on which state(s) are involved and whether the business has a presence in the state. As a basic, general rule, state income taxes should be withheld from employees based on the state in which work is performed – with the exception of the nine states that do not have a state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
However, the rules aren’t always clear-cut and it can be a challenge to figure out which taxes for which state(s) apply to each situation. Some states may have reciprocal agreements which allow employees with different resident and work states to be taxed only in one location. For states without reciprocal agreements, employees will likely be required to file income taxes in both the state they reside in, as well as the state they work in. Different states also have different criteria for establishing nexus. Nexus may be established when a business has employees performing activities in a state for a certain period of time, or if the company’s business activities result in a certain threshold of revenue in a state. When nexus is established, the business will then be responsible for withholding income taxes in the state.
And it doesn’t just stop at income taxes. Employers may also be required to contribute to state unemployment (and withhold from employee’s checks if in a state that has employee unemployment tax requirements). Workers’ compensation insurance might also be required, and special considerations made for other state-specific rules such as Paid Family and Medical Leave and temporary or short-term disability insurance. Depending on the state, penalties and interest may apply for incorrect or delinquent filing and reporting, which can add up very quickly for companies who may suddenly find themselves with employees in multiple states. Of course, in order to file and deposit the taxes, the business will need to be registered in each respective state to apply for the different insurances and employer identification numbers first, which can be an ordeal in itself.
Some states have released temporary provisions to provide relaxed nexus criteria and relief for employers during the pandemic. However, the provisions are not granted by all states, and the effective periods vary by state. The American Payroll Association provides links to the agencies of each state in its resource library. Although the information is readily available, deciphering the individual rules and keeping up with the ever-changing legislation can be a difficult and daunting task. The experts at Valor Payroll Solutions can help navigate the complex world of multi-state payroll and help businesses stay in compliance. Contact us today!