As the COVID-19 pandemic nears its end, businesses are reporting an increased demand for flexibility from their employees, including a desire to travel or to move closer to friends and family. With more out-of-state employees, organizations will need to learn how to navigate the additional payroll challenges of having a remote workforce.
Third-Party Payroll Providers
A critical recommendation for any organization facing out of state payroll is to use a third-party payroll provider. The importance of this grows with every new state added to its payroll. Leveraging an already existing Human Resources Information System (HRIS) that provides payroll services may be the best course to take, as having the HRIS and payroll system ‘talk’ to each other is most beneficial. When reviewing payroll providers, the list of services should include the following:
- Calculation and deposit of state taxes including income, unemployment, and city and local taxes
- Preparation of state tax returns and monitoring of state compliance requirements
- Management of state notices
State registrations are one service rarely handled by third-party payroll providers. Each state comes with its own set of rules related to state income tax, state unemployment, workers compensation, and city and local taxes. Along with that, some states require the organization to register as a business in that state, creating another level of complexity. Thus, each state must be researched to identify the requirements that apply.
The best place to start identifying the state requirements is on the state’s website. A quick search (e.g. “employer payroll taxes in WA state”) can take you directly to the state tax website, where an employer section provides the necessary information for registration requirements. Another option is to reach out directly to the state or to a trusted advisor for guidance.
State Income Tax
All but seven states have either a flat income tax or graduated-rate income tax. State income tax is typically dependent on where the employee performs the work and the amount of days the employee works in that state. If the state has an income tax requirement, the organization should register for a payroll tax account number and begin withholding the necessary state income tax. The employer should also review whether the state allows the Federal Form W-4 to be used or if the state has its own W-4 withholding form. At year-end, the state may require filing of an annual tax return or state annual W-2s.
Not-for-profit organizations (501(c)(3)) have the option to (a) to contribute to the state program in accordance with state law or (b) to pay into the state program annually an amount equal to the actual unemployment benefits paid out by the state program on account of employment services previously provided to the organization. Most organizations find Option B creates the least administrative burden and typically results in savings. However, during the pandemic, unemployment claims have risen dramatically, and the savings once incurred may not be the case any longer. The organization should weigh both options before making a decision.
Most states require employers to provide workers’ compensation for its employees. Some states require employers to obtain workers’ compensation directly with the state, while others require an extension of the current insurance policy to the out of state employee. Not-for-profits should consult with their current insurance carrier to determine how to extend coverage.
Along with workers’ compensation, some states also require disability coverage. Disability insurance covers off-the-job accidents or injuries that prevent the employee from doing their job. The process is similar to workers’ compensation. The organization will want to reach out to their current insurance provider to determine an extension of coverage.
Challenges and opportunities arise when having out of state employees. The ability to hire more talent from miles away also comes with additional compliance and administrative duties. If the organization is able to navigate the steps to register properly and has a robust payroll provider, the opportunities that an out-of-state or remote workforce presents may outweigh the unique challenges of state payroll.
If you have questions about your out-of-state employees and handling payroll correctly, please send me an email through our website.
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