There are a number of reasons to learn about the legalities and obligations of working across various state lines in the US.
Whether you have employees who commute to the office from a separate state every day, you’ve recently enforced work-from-home policies due to the pandemic, or you’re looking to hire employees and give them more flexibility about where they are based as a perk – you need to know what your responsibilities are as an employer. Let’s break it down.
Generally speaking, you will need to withhold taxes for the employee in the state in which they work, regardless of where your office and business is based. There are a few exceptions to this.
The first step is understanding whether the two states have a Reciprocity Agreement when it comes to income tax. A full list of Reciprocity Agreements can be found here, and will mean that you pay taxes in the home state, rather than the work state. if your business is based in New York, Pennsylvania, New Jersey, Nebraska or Delaware, for example, your employees may need to pay double income tax in order to work remotely.
Remember, the connection (known as nexus) between any two given states doesn’t only apply to income tax, so it isn’t only the employees’ cost. For example, no matter the reciprocity, State Unemployment Tax Act (SUTA) taxes should always be withheld and reported from the employees main working location.
Your company also needs to think about sales and use taxes, franchise taxes and payroll taxes for your business. Altogether, employees out of state could have a serious impact on your business bottom line, depending on the type of company in question and the two states under discussion.
No matter what, there is going to be some admin involved. You will probably need to register in the local state, which will include filing with the tax agency, and may also include the labor agency, and the unemployment agency, too. You’ll also be bound to the local laws in the state, which could cover issues such as minimum wage, vacation days, and even how long your employee coffee breaks can be. See below for more details on compensation and benefits.
Top Tips for Tax
- Each employee will need to submit a tax exemption form or non-residency certificate for the state in which they work in order to take advantage of any reciprocity agreement.
- You are only legally obligated to require employees to fill out a Form W-4 if you are changing the amount of tax you’re withholding.
- If you are not using a W-4, then you can confirm the employee’s new address by simply updating your payroll system, as well as their planned return date if you are not intending to register in that state.
A Note on COVID-19
In terms of short-term remote working due to COVID-19, some states are making temporary exceptions for employees that want to work out of state. At the moment, Indiana, New Jersey, Washington D.C, Massachusetts, Mississippi, Minnesota and Pennsylvania have said that they are not enforcing nexus, which means remote workers can work freely in those states. However, not all states have followed suit and said this explicitly, so it’s important to make sure you find out the laws for your specific situation. It’s also important to understand how the Reciprocity Agreements work, and the legal and tax-related constraints, in case this situation becomes permanent, or relevant outside of COVID-19 allowances.
Liability and Compensation
It’s important to note that if your employees are working from a different state, this may impact your own liability and responsibilities. Ask yourself, does the state of employment have any mandatory PTO requirements, mandatory retirement savings programs, or State Disability Insurance contributions to consider? Especially if the move is for the short-term, how will the employee’s I-9 form, which covers employment eligibility be handled?
In some cases, you might even need to raise an employee’s salary. For example, in Iowa, the minimum wage is $7.25 per hour, in line with Federal Law. Over the border in both directions, Illinois and Minnesota both have a minimum wage requirement of $10.00 per hour. Some states will have their own State Overtime law, which should also be considered.
As mentioned above, employers will need to register for, and pay any unemployment premiums in the state where their employees are performing work, and should look into any alternate documentation that needs to be provided to a terminated employee.
For example, in Massachusetts, two documents need to be given to an employee who has been terminated, a brochure on applying for unemployment benefits, and another on the locations of DUA career centers. In Georgia, you are obligated to provide a DOL form 800, which is a separation notice.
In terms of workers compensation, the employer must make sure that they have a statutory address in any state where a remote employee is located. This address can be used to channel legal correspondence that pertains to the business, without using a personal home address. They must also be cognizant that in general terms, any employee injury or illness that happens under the course of usual employment, no matter where it happens, can be claimed under workers’ compensation laws.
This is true even if the employer has no control or knowledge over a potentially hazardous environment in which the employee is working. SHRM summarized, “Courts have found that an employer’s lack of control over the conditions of an employee’s home-based work premises is irrelevant… Employers are responsible for providing the same safe work environment for telecommuters as for employees who work on company property.”
A Final Checklist for Handling Out-of State U.S Employees
Finally, here are a few items that you might want to consider before finalizing agreements with employees to work out of state. Ask yourself,
Am I compliant with local labor laws, not only state laws? Some states have enacted pre-emption laws, stopping municipalities from building on state or federal laws, but others may vary.
Have I covered required state and local govt posting requirements? Most employers are required to post notice of certain rights and protections to their employees. Has this changed, now they have changed state?
Do I need to think about E-verify requirements? Currently, 22 states, including Colorado, Florida, Idaho, Indiana, Michigan, Missouri, Nebraska, Oklahoma, Texas, Virginia and West Virginia and South Carolina require certain employers to use e-Verify.
What are the state requirements for jury duty? This can cover issues like advance notice requirements, how jury duty impacts benefits, and provisions that you may need to provide to achieve postponement or excusal from service.
Do I know everything I need to know about paycheck laws? From pay check stub requirements, such as what to do with paid sick leave check stubs, to final paycheck laws – make sure you have all your ducks in a row.
Are there different laws for drug testing? The laws for state drug testing are compex, and differ widely from state to state. Some states offer voluntary criteria for drug testing, others have very restrictive guidelines that you must adhere to, while others offer no guidance at all.
Have my COBRA requirements been impacted? Federal COBRA regulations impact employers with more than 20 employees, allowing those who lose their job to continue with health benefits for a limited amount of time. However, Mini-COBRA laws have expanded on these, including New Jersey that applies for employers with as few as 2 employees, and Arizona, Arkansas, Illinois, Texas, and Nevada, who put no minimum limit on the law, so it applies to any employer.
Getting Expert Advice is the New Look Before You Leap
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