Navigating the minefield of payroll compliance for remote workers can make anyone pull their hair out.  There has been a big spotlight over the past year on the accuracy of paying remote employees, with states looking to ensure that resident workers are being taxed appropriately. It’s not as simple as hiring a new employee who happens to be working offsite. Hiring a remote worker in a new state might trigger new obligations, and non-compliance can be costly for employers.

Payroll Tax Withholdings

Generally, states and localities tax the income of an employee based on where the service is being performed.  While at the start of the pandemic, many remote workers were deemed to have been working in their employer’s office, even if offsite, some of the flexibilities allowed by states due to the pandemic have now ended.  

First and foremost, if you have employees working in a state different from where your business is registered, you will likely have to register for employment tax accounts in that state.  While there are some states that might allow temporary work arrangements without this step, most states will require that you register for withholding tax and unemployment tax accounts. If this applies to your company, you should act early, as processing times can be lengthy.  This is an important step as these states will require payroll tax returns to be filed.

Of course, there are a handful of states that have no state income tax, so if you have employees in these states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming), that is one less step, however you may still need to register for unemployment tax.  Additionally, some states, and many cities and local municipalities have their own tax requirements.  You can see how quickly things can get complicated.

Wage & Hour Laws

Employers are generally aware of the federal requirements under the Fair Labor Standards Act to pay overtime to non-exempt employees who work more than 40 hours in a given week.  However, some states have their own overtime requirements which may be more generous to the employee and must be followed.  For example, in Colorado, overtime must be paid for all hours worked in excess of 40 hours in a workweek, 12 hours in a workday, or 12 consecutive hours without regard to start and end time, whichever calculation provides a greater payment of wages.

Additionally, while the FLSA sets minimum salary levels for overtime exemption for certain employees, certain state laws have higher salary thresholds for exemption.  

Final Paycheck Laws

What many employers don’t realize is that many states have differing requirements with the timing of paying an employee’s final paycheck upon separation of employment.  Some states allow payment according to the regular pay cycle, whereas some require departing employees to be paid immediately, particularly in the case of an involuntary termination.  

The Bottom Line

Make sure to research each state’s requirements surrounding payroll, and what you need to do to make sure you are prepared before your first payroll is run for your remote employees.