Here in the tri-state area, where it’s a relatively easy commute from Connecticut or New Jersey to Manhattan, for example, it’s quite common for Magone & Company clients to have employees who reside out of state. And with remote workers becoming more common, you may have more employees who live across the country rather than around the corner.
When your firm has employees who live in one state and work in another, tasks like employment taxes can get a bit tricky. Taxes are generally paid in the state where your team works, but you may run into issues if:
- Your company is located near a state border
- You have employees who travel to job sites in other states
- You have employees who work remotely
- You are expanding into new states
Having some basic understanding of how the system works will help you make the right decisions about classifying wages and avoiding penalties or amended filings. Both state unemployment and withholding taxes should generally be paid to the employee’s work state, but there are exceptions; the twist is that state laws are (literally) all over the map. Be sure to familiarize yourself with the state legislation that applies to your team. Here are the basics:
Reciprocity agreements
Some states that border each other have entered into agreements allowing employees, who live in one state but work in another, to have their withholding tax paid to the work state. For example, an employee who lives in Maryland but commutes to northern Virginia or D.C. for a job can have withholding tax paid to Maryland rather than the work state. This is also known as courtesy withholding, and it means the employee can file one tax return each year.
If you have an employee complete a non-residency certificate to excuse him/her from tax withholding in their work state, let your payroll provider know that your employee has an agreement in place. If there’s no reciprocal agreement, your employee will most likely have to pay both nonresident and resident state income tax. But luckily, most states grant a tax credit to cover the cost of being taxed twice.
The unemployment tax situation is usually straightforward. When an employee is working in multiple states or working remotely for a company based in another state, employers typically withhold state unemployment tax only in the state in which the employee is working.
When it gets complicated
Today’s remote-work world means situations that were rare or unheard of a generation ago are now commonplace. For example, consider an employee who works from her cabin in upstate New York, but your company is located in Atlanta — you’ll have to pay all state taxes to New York because that’s where the work is actually being completed.
Or, at that same Atlanta company, you have an employee who needs to work in Maine temporarily for three months. For nine months, you pay taxes in Georgia, and for three months, you pay taxes in the Pine Tree State.
As always, there are exceptions and special circumstances which may also impact your firm’s tax situation, so be sure to consult your trusted tax advisor for specifics. Need help with your cross-border workforce? The professionals at Magone & Company can help you organize your tax system accordingly.