Well, it sounds great. After all, if I make the job remote, then I can hire talent from ANY-where. The whole country is open to me. What could be wrong with that?
Actually, you’re right. More than ever, companies are expanding their talent searches beyond their state’s borders. But is there a down side?
It’s really more of a ‘pay attention to this’ side. Having out of state employees means you have to be on top of the various requirements for those different states.
I know – the first thing that comes to mind is payroll taxes -and those are important, but I’ll get to them in a minute. Let’s start with business registration. You see, if you have an out of state employee, then you need to register as an employer with that state. And even more importantly, you’ll have to register to do business in that state.
Now this crosses over into ‘talk to your accountant’ territory, so I’ll only give you a very general overview. You’ll need to reach out to that state’s Secretary of State department, and find out what requirements they have around doing business in that state. And yes, many times that means additional business taxes – sorry.
Another piece that’s sometimes forgotten is – you may need a registered agent in that state. Some states will only send documents to a physical address IN the state; so unless you want your employee getting corporate documents – you might think about an alternate option.
But again, talk to your account, they can give you advice and guidance on what’s right for your situation.
OK, next is registering as an employer in the state. Generally that process will also get you an unemployment registration number etc. This is a very important step, because without being properly registered as an employer, your payroll company won’t know where or how to pay taxes on your behalf.
Now, oddly some states require that you have a certain amount of payroll payments under you belt before they’ll accept your registration. Yes, it really is a chicken and egg kind of deal. In those cases, just let your payroll company know that the state has you ‘in process’ (after all, they’ve probably seen this before); and they’ll run your payroll, hold the tax funds in an escrow account, and pay them out once your account is fully set up with the state.
“…sometimes states have what’s called reciprocal agreements, meaning they’ve agreed to work with neighboring states on tax withholdings, where withholding in one state can count against the requirement in a different state.“
Here’s a pro tip – that’s what most payroll companies will do. But some won’t. Some may just run your payroll, and send you a note that you have to file and pay the taxes yourself. So be sure you know which type of payroll company you’re dealing with, and that you always read everything they put in the notes of your payroll journal. It could be some pretty important information.
And while we’re on payroll – you’ll have to set up payroll in the various states; because you’ll have to pay unemployment and most times, income taxes to that state. Now sometimes states have what’s called reciprocal agreements, meaning they’ve agreed to work with neighboring states on tax withholdings, where withholding in one state can count against the requirement in a different state. But, and this is a very important but – it should be the responsibility of your employee to speak with their tax expert to determine what is right for their specific situation.
In much the same way I don’t get out of my lane and try to give you tax advice, you should take the same precautions with your employees. What can I say – taxes are scary.
OK – onward to employment laws. Yep, as you know – different states have different must dos for employers. Most will have their own particular posters you’re required to put up. And there will probably be new hire notices too (for instance, in California we have a wage theft notice, and sexual harassment pamphlet.) And don’t forget the day to day things that might be different. Mandatory sick time, paid family leave, parental leave – all these types of laws will impact how you interact with your out of state employee, and they also have payroll implications too. For instance, in most cases Paid Family Leave is funded by employee contributions. So, you’ll need to know about taking that payroll deduction.
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Oh, and by the way, the requirements may start long before you even hire the person. You’ll have to make sure you know all about the minimum wage in that state (and pro tip – it may not just be a minimum wage for non-exempt employees; New York and California are only two of the states that have a minimum wage for exempt employees as well). And, some states now require you to give a salary range for every job you post. And there may be other specific rules for various locations.
I mentioned sexual harassment earlier – well beyond any necessary policies, there is the issue of training. Many states not only manage the cadence of training, but the content too. Providing compliant training for that state, and properly tracking it is something that often gets overlooked.
Now, if you have any type of benefit plan, you’ll need to stay close to your insurance broker. Why? Well because, most insurance companies look at where you have the most employees to determine your primary company location (or situs). And that situs can have a big impact on your premium costs – health insurance in New York is significantly more expensive than it is in Iowa.
And, even if your situs isn’t effected, the other thing you need to look out for is the actual plan coverage. If you have an HMO plan, and it only works inside California for instance, then your folks who are outside of California will have to enroll in a PPO plan instead – and they tend to be more expensive.
So again, work closely with your broker any time you’re thinking of going out of state.
You’ll also need to do things like making sure your workers compensation insurance lists those additional locations; and on the management side, things like determining how you’ll handle employee expenses. Will you want everyone to get together once or twice a year? If so, you need to put travel, lodging and venue expenses into your budget.
Those are the top 5 elements you need to keep in mind when hiring out of state employees. And yes, there certainly are more – but these will get you started.
Being able to get talent from anywhere can really help you expand your business – but only if you avoid the pitfalls.