Having a remote workforce has become pretty common. Especially since the pandemic forced many small businesses to figure out how to make it work. What might have started as a necessity has become an opportunity to expand your talent pool beyond geographic borders or hold on to employees who want to relocate out of state.
But having out-of-state workers requires meeting additional tax and compliance requirements — and it’s important to get it right. In this article, we dive into what small business owners need to know about running payroll for remote teams and how their taxes and compliance will change when they hire remote employees working out-of-state.
Handing payroll for remote employees
Taking the leap and hiring out-of-state employees likely means registering to do business there.
While the process varies from state to state, it typically involves obtaining a Certificate of Authority from the other state’s Secretary of State’s office.
Once you’re registered to do business in the state, the next step is registering as an employer in the state. Depending on the state, you’ll need to withhold and remit taxes from the remote employee’s pay.
The requirements vary from state to state. Some states’ withholding requirements are triggered by the number of days an employee works in the state, while some states require withholding once an employee reaches a certain amount of wages.
For example, Arizona requires businesses to withhold taxes for employees working in the state more than 60 days in a calendar year. But in Idaho, employers must withhold state income taxes if an employee earns at least $1,000 in the state.
Other states have “day one” requirements, meaning companies must withhold state taxes even if the employee only works one day in the state. There can also be reciprocal agreements between states, allowing companies to avoid withholding taxes for employees working in neighboring states.
Look into the specifics for each state your remote employees call home or work with a reputable payroll provider. This way, you’ll make payroll for your remote teams a breeze and keep your business on the right side of the law.
Hiring remote workers and physical nexus
Having an employee in another state can create what’s known as nexus in that state, impacting your tax obligations. In tax lingo, nexus is a connection or presence substantial enough to warrant taxation. You have physical nexus in a state when you have an office, warehouse, or a remote employee in the state. Many states also base sales tax requirements on economic nexus—a specific dollar amount of sales or a certain number of transactions in the state.
Hiring remote employees can trigger physical nexus in a state. This means you could need to start filing and paying taxes in that state or even begin withholding sales tax (if your business is subject to sales tax) on sales made in that state.
For example, Ohio requires any business with physical nexus to withhold and remit sales taxes on sales made to Ohio customers. However, companies without physical nexus must withhold Ohio sales tax once they hit $100,000 in sales or 200 or more separate transactions. (This is known as economic nexus)
So, say you’re a New York-based company that only makes a few sales to Ohio customers each year, never reaching the economic nexus threshold. If you hire a remote worker based in Ohio, you’ll have physical nexus there, and you need to register for a sales tax permit, charge sales tax to customers in that state, and remit the sales tax to the state’s revenue department.
Remember, navigating tax laws can be complex. It’s always a good idea to consult with a sales tax expert or a tax attorney when dealing with issues like physical nexus and sales tax obligations.
Understanding differences in HR laws
Just as tax laws vary, so do employment laws — and these differences can have significant implications for your payroll.
Minimum wage varies by state
The federal minimum wage is $7.25 per hour, but many states set their own minimum wages, which are significantly higher.
For example, in New York, the minimum wage can be as high as $15 per hour. In California, it’s $15.50. And in Washington, D.C., the minimum wage is $17 per hour.
The Department of Labor maintains a map of State Minimum Wage Laws. You must pay at least the state’s minimum wage for any remote employee you hire.
Employee rights to pay stubs
Each state has its own labor laws regarding pay stubs. There are generally three categories of pay stub rules:
- No requirement states. Employers don’t have to provide pay stubs in no-requirement states but may choose to do so.
- Access states. In access states, employers must allow 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. If the business offers electronic print stubs, employees must be able to print them.
The information you must include on a pay stub also depends on the employment laws in your state and industry.
How often do you need to pay remote employees?
Federal law doesn’t dictate how often businesses run payroll, but many states mandate how frequently you pay employees. Some states, such as Arizona and Missouri, require you to pay your employees bi-weekly, while others permit monthly pay schedules.
Again, working with a reputable payroll provider can help you comply with federal, state and local laws.
Wage garnishment complicates your payroll system
Wage garnishment orders require employers to withhold a portion of the employee’s wages and turn it over to a third party. Employee pay might be subject to garnishment due to child support, unpaid federal or state taxes, federal student loans, and other situations.
Handling wage garnishments is complicated when you have employees living and working across state lines because the maximum garnishment allowable can vary from state to state. Which laws apply—the state where the business is headquartered, the employee’s state of residence, the employee’s primary work location, or the creditor’s home state? What happens when employees are subject to garnishments from multiple jurisdictions?
There’s no easy answer, and it depends on the type of garnishment involved. Work with your accountant and attorney to determine how to handle garnishment orders.
Get help navigating payroll taxes for remote workers
Hiring remote employees can be a great way to source talent that might be difficult to find locally. That said, navigating payroll taxes for remote employees is something you shouldn’t take lightly.
Beyond the tax implications, there are laws around overtime, scheduling, breaks, sick pay, health insurance, workers’ compensation, disability insurance, direct deposit, and more. This list isn’t meant to dissuade you from hiring remote talent—just ensure you know what it entails. Please reach out if you have any questions or need someone to review state requirements and guide you on your next steps.