If you have business clients with employees in more than one state, they must pay careful attention to the payroll-related rules and tax responsibilities in the states where their staff members live and work.
With the middle of 2024 (and a new fiscal year for some companies) approaching, now is a perfect time to remind your business clients to assess if they're complying with their payroll responsibilities.
First things first, here's a quick summary of what managing multistate payroll involves:
- Paying wages and salaries;
- Making the appropriate payroll deductions from employees' compensation;
- Paying employment taxes and fees that employers are responsible for; and,
- Administering benefits for employees.
A business must pay attention to those tasks not only in the states where their company has a physical presence but also in states where they have
The following checklist can help your clients assess if they have all the bases covered.
1. Are they keeping accurate records about where their employees live and work? Your business clients should obtain and maintain accurate information about where their employees reside and conduct their work. Typically, the employment laws and payroll requirements of the state where the employee works apply. However, if an employee lives in one state and works in another, the employer might also be subject to the laws of the employee's home state. Also, some localities have their own employment laws, so there may be additional regulations to follow depending on the county, city or town where employees work.
2. Have they registered with the appropriate state and local labor departments? Employment laws — such as those regarding hiring practices, minimum wage, hours, unemployment, state disability insurance, workers' compensation and income tax — vary from state to state and sometimes by locality. Businesses must comply with not only federal labor laws but also those of the labor departments where their employees work.
3. Have they registered with the appropriate state and local tax agencies to withhold and remit employment-related taxes? Examples of possible state and local payroll taxes include:
- State income tax: This is withheld from the employee's pay. Most, but not all, states levy income tax.
- Local income tax: Some local governments have an income tax that employers must withhold from their employees' paychecks.
- State unemployment insurance: In most states, employers are responsible for paying this tax. In Alaska, New Jersey and Pennsylvania, employees also contribute via payroll withholding.
- Workers' compensation insurance: This is the responsibility of the employer. There is no deduction from employees' pay for workers' comp.
- State disability insurance: In some states, the employer pays for this entirely. In others, like California, the tax is withheld from employees' pay. Many employers choose to pay for disability coverage as a way to attract and retain staff.
Employing workers in other states requires a business to register with that state's tax agency, acquire a state income tax withholding number, get an unemployment insurance number, and possibly carry out other registration requirements. If an employee lives and works in different states, an employer might have to set up payroll tax accounts in the employee's home state and the state where the individual works. Some states have reciprocal agreements between them that allow employees who work in one state but live in another only to pay income taxes to their home state. State unemployment liability is typically based on the employee's work address.
4. Are they handling wage garnishments and voluntary benefits deductions correctly? Employers must withhold court-ordered wage garnishments from their workers' pay and submit them to the appropriate agencies or creditors. If employees have opted to participate in voluntary benefits offered by their employer, their contributions to those programs are also withheld from their compensation.
Examples of possible court-mandated and voluntary payroll deductions include:
- Alimony;
- Loan payments;
- Bankruptcy payments;
- Child support;
- Retirement fund contributions (e.g., a 401(k) plan);
- Health and life insurance premiums;
- Union dues; and,
- Disability insurance (if not fully paid by the employer).
5. Have they applied for foreign qualification in states where they have nexus? In addition, a business with remote employees may have to foreign qualify (register as a foreign entity) in the states where its employees live and work. Foreign qualification is required if the employer is considered to have
6. Are they in compliance with federal labor and payroll laws? Regardless of the states involved, employers must also ensure they comply with federal laws.
Several of the
- The Fair Labor Standards Act establishes standards for minimum wage, overtime pay, recordkeeping and youth employment rules affecting employees in the private sector and federal, state, and local governments.
- The Occupational Safety and Health Act sets forth regulations for providing a safe workplace.
- The Employee Retirement Income Security Act regulates employers who offer retirement and health plans for employees in private industry.
- The Family and Medical Leave Act requires private-sector employers with 50 or more employees to give up to 12 weeks of unpaid leave to eligible employees for the birth or adoption of a child or if the employee or their spouse, child, or parent becomes seriously ill. This act also includes special rules for military family leave.
They need an Employer Identification Number to file reports, withhold monies from employees' pay, and pay taxes. Federal employment-related taxes that employers must either pay or withhold from employees' paychecks include:
- Federal income tax: The employee's W-4 form determines the amount withheld.
- FICA Social Security and Medicare taxes: Half is withheld from employees' pay, and the employer pays the other half.
- FUTA: The employer pays federal unemployment tax. No monies are withheld from employees' pay.
7. Do they have the tools and resources in place to manage multi-state payroll properly? Handling payroll — let alone multistate payroll — has many moving parts. Even the slightest error can lead to major issues that require a painstaking process to correct. Payroll mistakes and missed deadlines can also lead to fines and other penalties.
Hopefully, your clients are getting legal advice from an attorney, using reliable accounting software and looking to you for guidance. With your expertise and assistance in managing payroll that expands to multiple states, they can feel more confident everything is in good order no matter where they have employees.
