As your business grows, you may find you need people who live outside your state. However, this can lead to payroll and tax headaches if you don’t handle things properly.
Taxation authorities expect employers to withhold state income tax from an employee’s wages, even if they work out-of-state. The employer may also be required to remit Social Security, Medicare, and unemployment taxes when:
- The employee works in another state for more than a temporary project
- The employee resides in the other state
- The employee travels to the other state to solicit business or perform other business duties.
Additionally, the definition of what constitutes a temporary project can vary greatly between states. Some impose a withholding requirement on a company if the employee performs work in their state for one day.
Finally, a company could have a withholding or employment tax filing obligation, but not an income tax filing obligation in any given state.
State legislation often refers to resident and non-resident requirements. These are their basic definitions.
- An employee’s “resident state” is the location of their permanent home.
- If an employee commutes to work from another state and it is not their permanent home, they work in a “non-resident state.”
Pay Taxes Where Employees Work
Generally, you have a responsibility to withhold taxes in the state the employee works. For example, if your business is based in North Carolina, but your employee works from their home in Virginia, you pay state payroll taxes and withhold income tax in Virginia.
However, you need to determine whether the states affected have a reciprocal agreement, because this changes your requirements.
What is a Reciprocal Agreement?
Neighboring states often forge reciprocal agreements so that people who work nearby can pay their income tax in their resident state.
In the example mentioned above, North Carolina does not have a reciprocal tax agreement with Virginia. The employee’s taxed on all their Virginia wages and must file a resident and non-resident tax return.
However, if your business is in Kentucky and your employee works in West Virginia, the employee can request a Kentucky tax exemption since the two states have a reciprocal agreement.
The employee needs to complete a non-residency certificate to excuse them from tax withholding in their work state. Payroll then withholds the correct tax amount in their home state, but still pays Kentucky payroll taxes on their behalf.
Still other states hold reciprocal agreements where both states agree not to impose a withholding requirement on any employee who works in their state. Legislation varies widely, so you need to understand each state’s requirements.
Obviously, addressing out-of-state obligations is often complicated and time-consuming. However, Charlotte payroll can ease your burden and simplify your payroll processes.
We understand payroll tax laws and can file withhold and remit taxes on your behalf. You’ll avoid non-filing penalties and ensure you remain compliant. Contact us for a free consultation to discover how we can help.