The HR Ally (HRA)

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How to Handle Payroll for Out-Of-State Employees

How to Handle Payroll for Out-Of-State Employees

There are a number of potential benefits when you hire remote workers. You can tap into a larger pool of talented workers, save on office space and other overhead costs, and enjoy greater flexibility in terms of hours and working arrangements. However, it’s not without its challenges. Managing payroll for out-of-state employees can be a headache. If you’re not careful, it’s easy to overlook payroll tax regulations when you’re paying employees who live in different states or even different countries.

At first glance, it may all be a bit confusing, but we’re here to help! In this art

icle, we’ll give you a rundown of how working with out-of-state employees affects the different aspects of payroll.

It’s vital to familiarize yourself with local labor laws in the state wherever your remote workers are based. This includes minimum wage criteria and compulsory breaks. You can find resourceful information in this comprehensive Department of Labor’s Employer Guide.

Workers’ Compensation

Workers’ compensation varies across states. Each state, with the exception of Texas, requires employers to provide workers’ compensation for employees. Although some

Out-of-state employee

 states directly give the employer workers’ compensation, others need an extension of the present insurance policy to the said employee. The advantage of having workers’ compensation in place is that not only are your employees protected in case of job-related injury or illness but as an employer, you’re protected from potential injury-related civil suits.

Disability Coverage

Some states require that disability coverage go hand-in-hand with workers’ compensation. It protects an employee from accidents or injuries that affect their performance. Because laws and regulations around disability coverage differ from state to state, it’s important to check with your state as well as the state of any remote employees, if applicable.

State Income Tax

Each state has its own taxing regulations. There are only eight states that do not impose an income tax; two of these states have income taxes on dividends and interest earned. Regardless, you’ll need to register to get an ID number in whichever state your remote worker resides in and follow their specific processes.

In some cases, states will have a reciprocity agreement. This occurs when two states agree that the worker only owes income tax to their residential state. An employee is saved from filing multiple tax returns with this arrangement and, as an employer, you would withhold and account for taxes only in your operating state.

Bear in mind, tax reciprocity is not a universal system. Always check with your state and your remote worker’s residential state to see if it is applicable.

State Unemployment

If a business employs an out-of-state worker, they’re required to register for unemployment tax (SUTA) in the state where the employee performs services in. Each state has its own set of unemployment tax rates and wage bases, so it’s important to consult with their respective unemployment office for specific instructions.

Payday Requirements

Depending on the state, the pay frequency can vary from weekly to biweekly to monthly. While you’re free to pay your employees more often than the minimum requirement, you must at least fulfill the minimum pay frequency as outlined by state law. As with other payroll regulations, you should ensure you follow the payday laws of the remote worker’s residential state.


Under federal law, nonexempt employees must receive overtime, at a pay rate of time and a half, for anything worked beyond 40 hours. As an employer, you must consider whether overtime is subject to different regulations than outlined by federal law.

Each state handles overtime differently. While many state regulations align with federal standards, other states prove to be more stringent. For example, your state may require overtime for employees who work beyond 8 hours a day. Another state may require overtime if an employee works all seven days of the week. To protect yourself and avoid potential penalties and fees as well as to provide your employee with the greatest benefit, it’s best to adhere to the most stringent regulations.

Paid and Unpaid Breaks

Currently, meal and rest breaks are not required under federal law with the exception of nursing mothers.

If you do offer them, however, the Fair Labor Standards Act (FLSA) dictates that breaks 30 minutes or longer are not required to be paid if your employee does not perform any work duties during that time. Breaks 20 minutes or less must be paid.

When designing break policies keep in mind states have their own regulations regarding paid and unpaid breaks. For example, Kentucky requires a 10-minute break every 4 hours, while Vermont instructs employers to provide reasonable bathroom and meal breaks.

It is especially imperative to communicate effectively about how breaks will be handled in a remote work situation.

Many of these payroll and tax regulations, and more, are stipulated by the state, so ultimately, the best course of action is to check with both your state and the state of your remote worker to ensure you’re in compliance with all applicable regulations.

Remote workers offer a number of benefits that are often overlooked by many small businesses. The ability to hire remote talent provides you with access to a larger pool of qualified applicants. It also gives you the ability to hire the best person for the job, regardless of geographic location.

Still, handling payroll for out-of-state employees can be a headache. Fortunately, there are experts in this field that can assist! If managing payroll for remote workers feels like an uphill battle, give us a call to speak with one of our payroll experts.

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