When Your Remote Employee Lives and Works in Another State

Remote working has exploded in the last few years, especially in professional services. Now that companies are seeing the benefits of remote work, they are also seeing the benefits of an expanded pool of potential employees. Some firms are hiring employees that live several states away from where the office is located, which comes with many ramifications for the business.  

Let’s say your business is based in Texas. You already file quarterly payroll reports and pay federal payroll taxes for your Texas-based employees. You also already file all the required state payroll reports and have Texas workers compensation. 

In May, you hired an employee that lives in Cleveland, OH. In June, you hired an employee that lives in San Francisco, CA. You’ll need to get set up to pay employees in each of these states:

• You may need to get set up as a Foreign Corporation in these states (the exact paperwork depends on your type of entity, as well as the state’s requirements and where your business originates). This means filing legal paperwork and complying with annual tax filings and statements of information. You may also need to hire a firm that can be your registered agent and legal contact in that state.  
• You must get workers compensation in those two states. 
• You must sign up with the unemployment agency in those states. For California, it’s the EDD (Employee Development Department), and for Ohio, it’s the Ohio Department of Job and Family Services.  
• You’ll need to work with your payroll provider to give them your account numbers so they can accurately create the paychecks with the appropriate state withholdings.  

But that’s not all. You’ll also need to make sure you file the correct quarterly payroll reports in addition to your federal ones. Continuing our example: In California, this consists of Forms DE-9 and DE-9C, Quarterly Contribution Return and Report of Wages. 

In Ohio, there are multiple forms: one for SUTA, IT 3, IT 941, and IT 501, all with exacting filing requirements.

Some states that are small and closer in proximity may have exceptions you can follow to save time. 

Nexus

Having an employee in another state might create a nexus for your organization, which means you may have additional tax and legal requirements beyond payroll taxes. 

• If you have sales in these states, you may also need to collect and remit sales tax on those sales and file sales tax returns. The first step is to register with the sales tax agency in the state.   
• As the business owner, you may even need to file a state income tax return and pay state income taxes as an individual, even if you’ve never set foot in that state!  

Hiring a remote worker is easy, but the paperwork that comes with it is often complex. Make sure you stay in compliance with all the tax and legal requirements of hiring an out-of-state worker. There can be some lead time in getting all this set up, so be sure to plan for this prior to your new employee’s start date. 

Seek out a professional who is well-versed in state and local taxes (SALT). They will be able to navigate this path for you and provide clear instructions on how to proceed. 

If you need help finding one, we can put you in touch with professionals that can help!