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Many employees work remotely and reside in states other than where their employer is headquartered. That arrangement can be positive for employees and employers, but an organization should consider the ramifications before hiring out-of-state workers.  

Employees are governed by the states where they live, not the state where the employer is located, regardless of where the employee reports. In other words, your employees in other states are subject to the law in those states, not to the law where your company is headquartered. Your remote employees are subject to withholding taxes and other employment laws in the state where they live.  

As an employer of an out-of-state employee, you are required to register as an employer in each state where you have even one employee and to notify the state that you have an employee who lives there. While that can sound challenging, it is not as difficult as it may first appear. All states have online employer websites with forms and information for registering your employee. Once you register with the state, it is not too difficult to maintain compliance.  

The federal taxes will remain the same based on the employee’s withholding status and preferences, but employers must withhold state income tax appropriately for the state where the employee lives. Not all states have a state income tax, but many do, and they all have different tax rates. Your company’s accounting department or payroll preparer should be able to determine the correct amount, withhold correctly, and remit the taxes to the appropriate state.  

As an employer, you are responsible for unemployment taxes and workers’ compensation in each state where you have employees. You may wish to check with your current insurer for benefits in all those states where you have employees, which may be less expensive and more efficient than contracting with multiple insurers, as long as the insurer is licensed and qualified in each state. 

In addition to properly withholding income tax, you must be aware of other employment laws in each state. That includes laws on minimum wage, leaves, sick pay, break times, drug testing, and any other employment law issues in each state where you have an employee. There is also a requirement to provide state-mandated employment law posters and other notifications to all employees, including remote workers. Our Poster service can help. Employers Council can also assist with a state-specific supplement for the employee handbook.   

Access to remote work can open many doors for employees and employers, including access to a wider talent pool for employers and expanded opportunities for employees, but both parties should be aware that there are legal and practical implications to hiring out-of-state. For your convenience, Employers Council offers an online tool to help you learn more about employment law and payroll requirements in all states. If you have any questions, please email our Member Experience Team.