In many workplaces, one of the pandemic’s long-term impacts will be the shift to remote work. Quarantines and lockdowns have pushed millions of people to work from home, and many will continue to do so after the pandemic ends. But the location of those homes might change.
According to a survey from Upwork, anywhere from 14 to 23 million Americans plan to move due to remote work — often to take advantage of more affordable housing and a lower cost of living.
This migration creates unique complications for employers, as compensation, benefits, and tax rules differ from state to state and even city to city.
5 Considerations When Working With Out-of-State Employees
If your business has remote workers, you’ll need to keep tabs on whether they’ve relocated. Once you’ve identified where they live or work, consider whether you need to change how you deal with these five areas.
Minimum Wage and Overtime
Each state has its own rules for minimum wage and overtime, and the laws in the state where the work is performed generally determine which state’s rules apply.
Currently, the federal minimum wage is $7.25 per hour. Some states set their minimum wage at the federal rate; some states have higher or lower minimum wages. Some localities within states even have their own minimum wages that may be higher than the state’s minimum.
Generally, businesses need to pay workers at or above the highest minimum wage that applies in the location in which they’re performing the work. For example, an employer based in Utah, where the state minimum wage is the same as the $7.25 federal minimum, has to pay Colorado workers at least $12.32 per hour, or $14.77 per hour if they live in Denver.
Likewise, the Fair Labor Standards Act requires employers to pay non-exempt employees overtime pay at a rate of at least 1.5 times the employee’s regular hourly rate after 40 hours of work in a given week. States may have their own overtime rules, and where both federal and state overtime rules apply, the employee is entitled to the highest applicable overtime pay.
State Income Tax Withholding
State income tax withholding rules typically follow the rules of the state where the work is performed.
When employees come to the business for work, payroll withholding typically follows the rules for the state in which the business is located. However, suppose employees are working from home in another state. In that case, the employer may need to withhold state income taxes for the employee’s home state — assuming the employee lives in one of the 41 states that tax wages and salaries.
Complicating matters, some states have a threshold for deciding whether the employer is required to submit taxes for the state where the employee is working. That threshold may be based on days working in the state, income, or a combination of the two.
For example, in Illinois, that threshold is 30 days. If an employee is an Illinois resident and performs work for an out-of-state employer from their home for more than 30 days, the employer is required to register with the Illinois Department of Revenue and withhold Illinois state income taxes from the employee’s pay.
Some states are waiving state withholding requirements for employees temporarily working from home due to the COVID-19 pandemic. Since these rules vary, check with your state’s Tax or Revenue Department for details.
State Unemployment Taxes
Generally, you need to pay state unemployment (SUTA or SUI) taxes to the state in which your employees work. So if you have one employee working in Arizona and another working in Kentucky, you’ll need to register with each state’s tax authority and pay taxes in both states.
In some states, unemployment taxes are employer-only taxes, meaning employers don’t withhold the tax from employee wages. In other states, employers withhold SUTA taxes from the employee’s paycheck.
Pay stubs are written documents that include details about items like the employee’s wages, hours worked, and withholding during the pay period.
Different states may have different rules surrounding whether an employer needs to provide pay stubs, and what is included on those pay stubs. There are generally three categories of pay stub rules:
- No requirement states. In nine states, employers don’t have to provide pay stubs, although they may choose to.
- Access states. Twenty-six states are access states, meaning employers are required to provide access to an electronic pay stub, but they’re not required to provide a physical copy.
- Access/print states. Eleven states require employers to provide a written or printed pay stub. Employers that offer electronic pay stubs must ensure the employees can print their statements.
The payroll provider IRIS FMP provides a list of states that fall into each category.
While no federal laws govern how often businesses must pay their employees, many states mandate how frequently employees receive their wages. Many require a monthly, semimonthly, biweekly, or weekly minimum frequency.
The U.S. Department of Labor maintains a table of state payday requirements and notes about different pay frequency law complexities for each state.
Watch Out for These Common Mistakes
Navigating the labor laws, rules, and taxes in each state can be daunting. Missteps can lead to financial penalties, which may result in funding previously allocated to business-related projects going towards avoidable fines. Even worse, it may make it hard to manage current debt or force you to secure financing specifically for this reason. Here are a few common mistakes to avoid.
- Misclassifying new hires. Independent contractors generally aren’t subject to tax withholding, overtime or unemployment, so it can be tempting to classify out-of-state workers as independent contractors to avoid hassles. But that can be an expensive mistake: The IRS routinely cracks down on companies that misclassify workers to avoid taxes, and employers may be responsible for penalties, back employment taxes, and federal income tax not withheld. Check out the IRS page Independent Contractor (Self-Employed) or Employee? for guidance on correctly classifying employees.
- Forgetting about city laws. Federal and state laws aren’t the only laws employers have to navigate when dealing with remote workers. In many states, local ordinances can affect withholdings, paid sick leave, minimum wage, and other labor laws.
- Trying to DIY payroll. Navigating payroll, withholding, taxes, and labor laws in one state on your own is difficult enough. If you have employees spread across multiple state and local jurisdictions, it can be downright risky. If you don’t already have a payroll provider, hiring one can help alleviate many of the burdens of dealing with these issues. They can help you register with the proper authorities, ensure your company complies with all payroll laws, and file payroll tax returns on your behalf.