Hiring Out-of-State? Here’s What You Need to Know.
Remote work has exploded since the onset of the pandemic, especially in professional services. Now that companies have seen that remote work models are both productive and feasible, they’re realizing the benefits of an expanded pool of potential employees, too: some firms are hiring employees that live several states away from where the office is located. While this is an exciting opportunity for both employers and professionals, it comes with a few ramifications for employers. Below, we’ll walk you through what these could look like for your state.
Let’s say your business is based in Texas. Already, you file quarterly payroll reports and pay federal payroll taxes for your Texas-based employees. You also file all the required state payroll reports and have Texas workers’ compensation.
Now let’s imagine that in May, you hired an employee that lives in Cleveland, OH. And in June, you hired another that lives in San Francisco, CA. In both cases, you’re required to complete a few extra steps to run payroll for your new employees.
- You may need to get set up as a Foreign Corporation in these states (the exact paperwork depends on your type of entity as well as the state’s requirements and where your business originates). This means filing legal paperwork and complying with annual tax filings and information statements. You may also need to hire a firm that can be your registered agent and legal contact in that state.
- You must get workers’ compensation in those two states.
- You must sign up with the unemployment agency in those states. For California, it’s the EDD (Employee Development Department), and for Ohio, it’s the Ohio Department of Job and Family Services.
- You’ll need to work with your payroll provider (think: QuickBooks Payroll or ADP) so they can accurately create paychecks for your new team members with the appropriate state withholdings.
- You’ll need to file the correct quarterly payroll reports (in addition to your federal ones) for both states.
It’s important to note that each state has its own forms and requirements with precise filing requirements. Some states that are smaller and closer together may have exceptions you can follow to save time, since it’s more likely that workers crossed state lines for work before the pandemic, but this is not often the case.
Nexus is the connection between a company and a state that requires the company to register and then collect and remit sales tax in that state. Having an employee in another state establishes nexus for your organization, which means that you may have additional tax and legal requirements beyond payroll taxes. For example:
- If you have sales in these states, you may also need to collect and remit sales tax on those sales and file sales tax returns, where you otherwise might not have unless you met certain sales thresholds. Your first step is to register with the sales tax agency in the state where your new employee resides.
- As the business owner, you may even need to file a state income tax return and pay state income taxes as an individual, even if you’ve never set foot in that state!
Making the job offer to a remote worker may seem easy, but the paperwork that follows will be anything but. Ensure you comply with all tax and legal requirements brought on by hiring an out-of-state worker. You may need some lead time in getting all this setup, so be sure to consider this in establishing your new employee’s start date.
As always, if you need help with any of these tasks, please feel free to reach out to us any time.