Remote work is becoming increasingly popular with businesses and employees: According to estimates, flexible work arrangements have become three to ten times more common since 2019. Offering remote work options can give employers access to a national talent pool, reduce overhead costs, and help businesses attract and retain the best people for their teams.
This shift also means that an increasing number of companies face multi-state payroll obligations. If you employ out-of-state remote workers, have business locations in multiple states, or have employees who travel for work, you may be required to withhold taxes in multiple states.
For business owners, running multi-state payroll introduces a host of complications around state tax withholding and payroll compliance. Requirements vary from state to state—but in some cases, you may be required to withhold taxes in every state where an employee performs work, your employee’s state of residence, and the state in which your business is located. Failure to comply with multi-state payroll and withholding requirements can lead to fines or other penalties against your business.
When does multi-state payroll apply?
A number of different business scenarios can require employers to run multi-state payroll. Common situations include the following:
- You employ workers in multiple states. If you have office locations in multiple states or have employees who work out-of-state (including remote employees), you may be required to withhold taxes for multiple states.
- Your employees live in one state but work in another. If an employee lives in one state but commutes to another state to work, you may have multi-state payroll obligations. As an example, if your business is located in New York and your employees live in Connecticut, you may be required to withhold tax in both states.
- Your employees work in multiple states. Multi-state payroll tax obligations can arise for employees working in multiple states. If your employees travel for work, you may need to withhold tax for the states in which they perform work.
How taxes work when you’re a multi-state employer
In general, most states require employers to withhold tax from employee wages in the state where work is performed, which is known as the “work state.”
Specific requirements vary by state. Certain exemptions can apply, and in some cases, you may be required to withhold taxes in states other than the employee’s work state, including the employee’s state of residence or the state where your business is located.
- Payroll taxes for remote workers. If your business employs remote workers who work from home, you may need to withhold state income taxes in their work state (i.e., their state of residence). Depending on the tax laws in the state where your business is headquartered, you may also need to withhold taxes in the state in which your business is located. Consult with your CPA to understand the withholding requirements in your state(s) of business.
- Payroll taxes for employees who travel for work. If an employee travels to perform work in another state, state requirements determine when the employer is required to withhold taxes in that state. States can apply thresholds based on income, the number of days worked in the state, or both. As an example, Arizona only requires withholding if an employee works more than 60 days in the calendar year from the state, Idaho requires withholding if an employee earns more than $1000 in the state in a calendar year, and Alabama requires withholding for any work performed in the state, regardless of dollar amount or days worked.
- Payroll taxes for employees who commute from another state. Some states require tax withholding based on the state of employee residence, even if the employee performs no work in that state. In some cases, this requirement only applies to employers who have other business activities in the state of employee residence. But if state law requires it, an employer may have to withhold taxes in both an employee’s state of work and state of residence.
Reciprocity agreements between states
Some states have reciprocity agreements, agreements between states that simplify taxation and tax reporting so that employees who live in one state and work in another aren’t subject to double withholding. These create an exception to the work-state rule and generally only require employers to withhold taxes in the employee’s state of residence.
To obtain reciprocity in a state, an employee must file a state-issued form with their employer.
| State | Reciprocity Agreements |
|---|---|
| Arizona | California, Indiana, Oregon, Virginia |
| District of Columbia | Maryland, Virginia |
| Illinois | Iowa, Kentucky, Michigan, Wisconsin |
| Indiana | Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin |
| Iowa | Illinois |
| Kentucky | Illinois, Indiana, Michigan, Ohio, West Virginia, Wisconsin, Virginia |
| Maryland | District of Columbia, Pennsylvania, Virginia, West Virginia |
| Michigan | Wisconsin, Indiana, Kentucky, Illinois, Ohio, Minnesota |
| Minnesota | Michigan, North Dakota |
| Montana | North Dakota |
| New Jersey | Pennsylvania |
| North Dakota | Minnesota, Montana |
| Ohio | Indiana, Kentucky, Michigan, Pennsylvania, West Virginia |
| Pennsylvania | Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia |
| Virginia | Kentucky, Maryland, District of Columbia, Pennsylvania, West Virginia |
| West Virginia | Kentucky, Maryland, Ohio, Pennsylvania, Virginia |
| Wisconsin | Illinois, Indiana, Kentucky, Michigan |
Convenience of the employer rule
Five states (including Arkansas, Delaware, Nebraska, New York, and Pennsylvania) may require employers to withhold taxes even if an employee neither lives nor performs work in the state where their employer is located.
These states apply the “convenience of the employer” rule to determine where withholding is required.
- Employer’s convenience. If the employer requires the employee to work in another state, withholding requirements are based on the work state.
- Employee’s convenience. If the employee chooses to work in another state for their own convenience, employers are required to withhold tax in both the work states and the state where the business is located.
Consult with your CPA for guidance on navigating any potential double withholding requirements.
Types of taxes multi-state employers have to withhold or fund
Employers may be required to withhold or fund the following types of taxes:
- Income tax. Employers may be required to withhold state income taxes in states where state income tax applies. Withholding is not required in the nine US states that don’t have state income tax requirements: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- State unemployment tax (SUTA). SUTA is a payroll tax that helps states fund state unemployment programs. Most states require employers to fund SUTA taxes, but Alaska, New Jersey, and Pennsylvania also allow employee contributions. Some states also exempt certain organizations (such as some nonprofits) from SUTA tax obligations.
- Disability fund tax. California, Hawaii, New Jersey, New York, and Rhode Island require participation in a state disability fund, which is levied in the form of a state disability insurance (SDI) tax.
- Workers’ compensation. Workers compensation isn’t a tax, but it is something employers are required to pay—sometimes to state-run funds. Six US jurisdictions require employers to purchase workers’ compensation insurance from state funds: North Dakota, Ohio, Washington, Wyoming, Puerto Rico, and the US Virgin Islands.
- Paid family medical leave tax. As of January 2023, seven states (including California, Connecticut, Massachusetts, New Jersey, New York, Rhode Island, and Washington) make paid family medical leave benefits available to all workers, and five more states and Washington DC require some employers to offer these benefits. Specifics vary from state to state. As an example, California requires all businesses to participate in the state’s paid family leave (PFL) program, and contributions are withheld from employee payroll in the form of PFL tax.
Compliance with wage and hour laws
Maintaining multi-state payroll compliance also requires employers to comply with minimum wage and overtime requirements in every state where they run payroll.
- Minimum wage. As of January 2023, 30 states, DC, Guam, Puerto Rico, and the US Virgin Islands set minimum wage requirements higher than the federal requirement of $7.25/hour. Employers in these states are required to pay according to state standards.
- Overtime and hour laws. Some states apply stricter overtime pay laws than the federal government. Methods of determining overtime pay vary from state to state and can include hours worked in a day, hours worked in a week, or consecutive hours worked regardless of the start or end time of the shift.
Multi-state payroll compliance
Multi-state payroll is complex. Payroll professionals need to assess state-specific withholding, wage, and hour requirements and be aware of any changes in state law or in employee or business activities that could affect withholding obligations.
Overwhelmed by multi-state payroll complexities? Mosey can help. Mosey’s compliance management platform automates the process of registering for payroll accounts in new states. Connect your payroll data directly to our platform to track compliance with withholding requirements in every state—and get notified when it’s time to take action.
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