For the past year and a half, the term “new normal” has been used to describe several aspects of life and work. When it comes to business, there may not be any bigger transformation than the explosion of remote work. But beyond the logistical considerations business owners and executives should consider when determining the best remote work strategies, they also need to consider the implications of state tax withholding.
Now that companies are more likely to employ workers across state lines, it’s imperative that they either make themselves more familiar with various withholding requirements or consult professional payroll services. As an introduction, these are the foundational aspects of what executives should know.
MULTIPLE STATE TAX WITHHOLDING EXAMPLES
With each paycheck, you need to withhold and deposit payroll taxes to cover several obligations. At the federal level, these include income taxes, the employee’s and employer’s share of Social Security and Medicare taxes. But you may also be responsible for state tax withholdings, including:
State income tax: In a majority of states, state income taxes must be withheld from employees’ paychecks. Exceptions include: Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming. In addition, New Hampshire and Tennessee don’t tax wages.
State unemployment benefits: An increasingly typical scenario for remote workers is when an employee works in one state but lives in another. If this applies to your organization, your payroll or HR manager pays unemployment taxes on behalf of the employee’s state. However, there are a few exceptions to the rule. If your employee works in Alaska, New Jersey, or Pennsylvania, your organization is responsible for paying taxes on behalf of and withholding taxes from employees.
Temporary disability: In some states, including California, Hawaii, New Jersey, New York and Rhode Island, you’ll need to withhold deductions from employees’ wages to fund the state’s temporary disability insurance (TDI) benefits program.
Paid family and medical leave: A few states like Massachusetts have paid family and medical leave (PFML) programs that require employers to withhold and remit PFML contributions from employees’ paychecks.
These withholdings will vary from state to state. To understand exactly what you need to withhold, the first step is determining the correct state for purposes of income tax and the other taxes. Beyond that, you may start to consider outsourcing to a trusted and proven payroll and HR solutions system.
An employer may be required to withhold income tax from wages for an employee’s state of residence – even if the employee does not perform services there – if the employer has a business presence or operations in that state, also referred to as nexus. The presence of a business location, such as an office, store, or factory in the state will create nexus there, as will the mere entry of an employee to make a sale or perform a service call. Additionally, an employee working remotely from his or her state of residence on an occasional basis might be enough of a business presence to create nexus.
During the COVID-19 pandemic, for example, many state tax agencies issued guidance temporarily waiving nexus if it would have been established by the presence of resident employees working temporarily from home solely due to the pandemic.
A reciprocal agreement is a compromise between two states that allows residents of one state to request exemption from tax withholding in the other state. It means an employee only must pay income taxes to one state (work state) vs. two states (work and residential state). If there is no agreement in place, your employee will most likely have to pay income taxes to both states. The good news is most states grant a tax credit so an employee can avoid double taxation.
When two states have a reciprocal agreement for tax purposes, it makes things administratively easier for the employer by allowing it to withhold only for the state of residence.
If an employee works in multiple states that do not have reciprocity with the employee’s state of residence, then the laws and requirements of both states must be considered. The employer might need to withhold state income tax for both the work state and the state of residency.
INVESTING IN YOUR WORKERS & THE FUTURE
As more companies adjust to an inclusive workplace that includes both in-person and remote workers, the ability to acquire top talent from different states enhances productivity and success. However, it is essential that all these businesses stay informed to maintain state tax withholding compliance.
Partnering with a payroll service company that specializes in providing payroll, tax compliance, and HR solutions ensures that your business receives customized support and guidance for all your workforce needs.
Payroll Vault offers a personalized approach to small and medium-sized businesses to minimize your tax burdens so you can focus on building a positive and motivated workforce. Our experts stay up to date on federal, state, and local tax regulations to keep you compliant and efficient at every level.
To learn more about how Payroll Vault can work for your business, get a quote.