Navigating Payroll,Tax, and HR in Multiple States: Part 1

As remote work continues to grow, employers are increasingly managing teams spread across multiple states. While the flexibility of remote work offers great benefits, it also creates new complexities—especially when it comes to payroll, payroll taxes, and HR compliance.

Whether you’re expanding your workforce or adjusting to a hybrid model, understanding your responsibilities across state lines is essential to paying your employees correctly and avoiding penalties for non-compliance. 

In part one of this two-part PayDay, we will discuss the payroll and tax implications of hiring out-of-state employees. In part two, we will discuss the HR implications. Here’s what employers need to know when it comes to multi-state payroll and tax.

PAYROLL BASICS FOR MULTI-STATE EMPLOYERS

Generally speaking, employers are required to comply with payroll and labor laws for the state where the employee is physically working (even if at home) – but there’s much more to it than that! Sadly, there is no “one size fits all” when it comes to multi-state payroll.  The rules vary by state, industry, type of work. etc. For employers who employ remote workers in several states, this can become very complex and cumbersome. For the sake of our conversation, we will focus on Indiana employers who employ out-of-state workers, but many of these general concepts will apply to employers based elsewhere. 

EMPLOYEE WORKING IN INDIANA BUT LIVING IN ANOTHER STATE

• STATE WITHHOLDING TAX – When an employer hires a new employee who will work at their Indiana location, but resides in a state outside of Indiana, the employer must first determine whether the home state of the employee holds a reciprocal agreement with Indiana. This will dictate what withholding tax the employer must withhold.

  • INDIANA RECIPROCAL AGREEMENTS– Indiana has reciprocal agreements with 5 states: Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin. These agreements are designed to prevent double taxation for employees. Here’s how it works: If an employee lives in one of these five states but works at your Indiana-based company, you only need to withhold state income tax for the employee’s home state—not Indiana. The employee must submit Form WH-47  to their employer to claim exemption from Indiana state income tax withholding. (The employer should keep this form on file.)
    
    The employer will need to apply for a withholding tax account in the employee’s home state (as applicable – not every state has withholding tax). This should always be done as soon as possible to avoid late penalties. It is also important to note that local tax (city/county, etc) is not covered by the reciprocal agreement. So, Indiana employers will need to withhold county tax for the county where the business is located even if the employee lives in one of the reciprocal states listed above. For example, if your Richmond, Indiana business hires an employee who lives in Dayton, Ohio and commutes to Indiana for work, the employee would have Wayne county (Indiana) tax withheld on each paycheck.  (Those who live in Indiana will pay county tax based on their county of residence on January 1 of the current year.)
  • NON-RECIPROCAL STATES – If an Indiana employer hires an employee in a state with no reciprocal agreement (such as Illinois), the employer may need to withhold both Indiana withholding tax AND withholding tax for the state where the employee resides. AccuPay’s payroll software will correctly calculate this tax based on the home and work addresses. Employees should seek the advice of a tax preparer or CPA before filing taxes to avoid overpaying tax if multiple states are withheld. 
• UNEMPLOYMENT TAX – In most cases unemployment tax is paid where the employee works. Some multi-state employers pay unemployment tax to a single state where they are deemed to have a base of operations.  The Department of Labor provides strict guidelines for determining if this method may be used. In most cases, for out-of-state employees working in Indiana, wages and tax due will always be remitted to Indiana Department of Workforce Development. Non-profits will report the same as they currently do for Indiana employees.

EMPLOYEES LIVING AND WORKING OUT OF STATE

• STATE WITHHOLDING TAX – When an employer hires a new employee who will both lives and works in a state outside of Indiana, the employer needs only to withhold the applicable withholding tax for the employee’s residence/work state, as well as any applicable local taxes. There is no need to withhold Indiana state or county tax in this case. (For the sake of this article, we will assume the employee works and lives in the same state.)
  • “DOING BUSINESS” IN ANOTHER STATE. Many states will consider your company as having a “nexus” (ie: doing business in their state) in any state where you have at least one employee working – even if working from home. Therefore, you may be required to not only register for a withholding tax account (as applicable) but you may also be subject to sales tax or corporate income tax depending on your business, and the state’s rules. The state’s website should have a guide for new employers that will include this information, but it’s a good idea to get your CPA involved to ensure all required filings are completed. If you are an AccuPay client, always be sure to notify your payroll specialist when you hire an out-of-state employee. Your specialist will work with our tax team to provide the information needed to apply for payroll tax accounts as soon as possible. Many states will not waive late fees if you do not attempt to register timely, so it’s very important to communicate any new states and to register for the applicable taxes as soon as possible.
• LOCAL TAXES – Employers will typically be required to withhold any applicable city or county tax for the employee’s work location. On the other hand, employers may or may not be required to withhold all local taxes for where the employee resides. In some cases, these taxes are considered a “courtesy” since the employee IS liable, but the employer is not required to withhold. This area can be VERY complex, so if hiring employees in states like Pennsylvania, Ohio, or Kentucky where local tax is very common, you will want to be working with a payroll provider who understands the nuances of local tax and has the tools to research your specific situation. AccuPay uses state-of-the-art software that will provide the required and optional “courtesy” withholding information so an employer can decide how to proceed. Employers should provide the resident and workplace address to their Payroll Specialist as soon as the employee is hired to determine which accounts need to be opened for timely filing.
• UNEMPLOYMENT INSURANCE TAX (SUTA) – The employer will need to register to pay unemployment tax in the state where the employee works. Check with the agency to see when liablity begins, as some states will not allow you to register until you have had an employee working in the state for a set number of weeks (usually 20). If you are a non-profit, be sure to check the state’s website to see if you are liable. Some states do not give an exemption to non-profits, while others will have a very short timeframe to apply as reimbursable. 
• PAID FAMILY LEAVE AND/OR STATE DISABILITY INSURANCE – Several states have implemented mandatory contributions to state funded paid family leave programs and/or disability insurance. A single employee working in the state will often trigger these requirements, though each state has its own rules, including whether the employee, employer, or both contribute. Some of these programs are handled as part of the quarterly payroll tax filing, such as California, Colorado, Connecticut, Massachusetts, Oregon and New Jersey family leave. Others, like New York disability, require a monthly premium more like traditional disability insurance, and may be paid by the employer outside of payroll. It is important to review the rules of each state and work with a payroll provider, like AccuPay, who works with multi-state taxation and can provide guidance on which accounts need to be set-up, as well as set up any necessary employee deductions. (Click here for more information about state-run PFML programs.)
• WORKERS COMP – Check with your existing provider to see if  you can add employees in other states to your existing plan. Workers comp rates are based on where the employee is physically working, and some states require employers to participate in state workers comp programs, some of which may be handled thru payroll. 
• STATE LABOR LAWS, including minimum wage, sick leave, and notice requirements must be reviewed when hiring in another state. Our next article will cover this in more detail, but for payroll purposes, you must be sure that your hourly or salary rates are compliant with the state’s wage laws. Some states have different wage minimums for different industries, so it is wise to check on the state website before establishing the employee’s rate of pay.

BEST PRACTICES FOR MANAGING MULTI-STATE PAYROLL

When hiring out-of-state employees, employers must consider the additional responsibility that “operating” in another state may impose. The decision to hire out-of-state requires a commitment from the employer’s payroll, accounting, and HR teams to “do the research” and understand what new requirements come along with adding a new state. 

For the best results, here are things to consider when adding an out-of-state employee to the payroll:

• Work with a payroll provider, like AccuPay, who supports multi-state tax filings. The requirements of each state are vastly different and having a partner who will guide you on what accounts need to be opened (or don’t) and who will file and pay your new tax liabilities on time is imperative. AccuPay clients are able to reach out directly to their assigned Payroll Specialist who already knows their business and can get to work right away (with the help of AccuPay’s Tax and HR experts) to get employers the information they need to set up new states accurately and efficiently. (No call centers here!)
• Track employee locations and regularly audit where your team is physically working. Be sure to notify your payroll specialist when adding a new state, and update work locations in the software as able. AccuPay’s isolved software will automatically update tax settings when a work location is changed. Audit reports are available to show these changes and to help you quickly view which state everyone is assigned to.
• Register early in new states to avoid penalties. The amount of time each state requires to process new applications varies widely, and some will not grant waiver of penalties if the account is not open in time for the first filing/payment. Best practice is to apply as soon as the out-of-state employee is hired. Your AccuPay Payroll Specialist will work with our tax team to provide the appropriate application forms or links to online registrations. Many of these are also on our website.
• Keep an open line of communication with employees – Provide information on how employees should notify you of address changes, and communicate with them regarding tax implications of new resident or work locations.
• Forward any correspondence, tax notices or rate information to your payroll provider as soon as received.

CONCLUSION

This article just scratches the surface of all that may be involved in hiring an employee in a different state. Keeping up with payroll requirements in multiple states can get tricky quickly, as states vary significantly in their tax structures and employment regulations. While working with a multi-state payroll provider like AccuPay can be a huge help in navigating these complexities, employers must be proactive in learning the basic requirements of the states where they pay employees. As you will see in Part 2, an employer’s responsibility reaches well beyond payroll and tax.

If you plan to hire or expand your business to multiple states, consider consulting with a tax advisor or employment attorney with experience in multi-state compliance to ensure you’re covered as each state is added. Many states and even local tax agencies require reporting beyond the payroll returns your payroll provider will prepare and file. 

Need Help Managing Multi-State Payroll?
Contact AccuPay today to learn how we can help you simplify payroll, stay compliant, and support your team—no matter where they are. Our team of payroll, tax, and HR experts, supported by our state-of-the art HCM software can ease the burden of multi-state payroll! Contact us at info@accupay.com or call us at 317-885-7600.

To learn more about the HR implications of hiring an out-of-state employee, stay tuned for Part Two!