Payroll implications for out-of-state employees

It’s an exciting and busy time when new workers join a company.

While there are a number of steps involved in the employee onboarding process, things can become a bit more complex if any of those new hires are also working out-of-state.

Because each state has different laws regarding payroll, establishing a plan to ensure that your business is compliant and properly paying out-of-state employees is crucial. Knowing how much to withhold from a paycheck can be confusing. This means your company must keep up-to-date on that state’s filing deadlines, their tax rates and any tax law changes.

Here are a few things to consider:

  • What determines where a company pays an out-of-state employee’s taxes? – A remote employee’s payroll taxes should be paid in the state where they live and work, not the state where your business is located. It means that your company must register and pay state unemployment tax as well as any local or state withholding income tax, for the employee in that state. Additional payroll taxes may apply depending on the state.
  • What if the employee is driving to work in your company’s state? – If a worker lives out-of-state, but is coming into the office each day, generally your business will pay and withhold payroll taxes to the state where your company is based. It’s possible the two states involved may have what’s called a reciprocal tax agreement, which allows an employee to pay taxes in the state where they live as opposed to where they work.
  • What about workers’ compensation insurance? – This is important for any business owner with a new employee, but is often times forgotten about when hiring out-of-state workers. Check with your current worker’s comp insurance policy and ask about adding remote employees. If you don’t have a policy, research whether the new hire’s home state requires it. Most states demand worker’s comp insurance.

As Wisconsin’s premier payroll provider, IPS handles compliance issues for remote workers on staff and can also file withholding tax returns on a company’s behalf. If you have any related questions, contact your IPS payroll specialist.