Remote and traveling employees have long been a choice for many companies. However, there are current trends that are steadily moving to more and more companies hiring workers in other states. This leads to questions about multi-state tax withholdings. It is vital that businesses be educated on the requirements from state-to-state as every state is different.
Tips and Information
So you have a person you hired who is working in another state. The first determination to make is: 'is this person an employee or an independent contractor'? That question needs to be answered not by you but by the state and federal laws that classify employees versus independent contractors. An independent contractor is paid directly without any taxes withheld so you won't need to be concerned about withholdings. However, if the person you hire is, in fact, an employee, you will want to do your homework on this complicated situation. Some things to remember:
- There are no state taxes for Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If your employee lives and works in one of these states, you will not need to worry about state tax withholding.
- Is your employee an in-state or out-of-state employee? Non-resident states are any situation where your employee travels somewhere that he is not a permanent resident and resident states are when an employee lives and works in the same state.
- Does the employee travel to another state to work or is he working in the same state where your business is based?
- In most situations, the taxes must be withheld from the state in which the employee does the work. The only exception is if the state in which they work has a reciprocal agreement with their home state. Some states collaborate on taxes so do your due diligence on this one.
- Some states have a maximum number of days an individual may work within the state before beginning to pay state taxes while others may require payment of taxes from day 1. These laws vary from state-to-state.
- If an employee does work in multiple states, there is a strong possibility you may be required to withhold state taxes for all of them. Again, this is on a case-by-case basis and determined by the states various laws.
What Should I Do If An Employee Is Subject to Multi-State Withholding?
You must first register with each state, possibly local and unemployment agencies in the state in which your employee is working. Secondly, you will want to learn all about the labor and pay laws in each state to make certain you are meeting those requirements. Lastly, you will need to withhold, pay and file the state taxes for each state. Sounds like a lot of work, doesn't it?