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Payroll and Taxes

Common questions covered here
Do remote employees in a different state have to pay local taxes?
What state do you pay taxes in if you are a remote worker who works from home?
Can remote workers be taxed on the same income in two states?
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In general, most basic employment rights (including minimum wage, overtime, and more) are governed by the laws of the state where an employee works.* When it comes to payroll and taxes, this is very much the case. If your company is in California, but you have an employee in New York, they will need to pay local New York-based taxes, and you will be responsible for tracking and withholding those. You’ll also need to be aware of withholding requirements for things like workers comp and disability insurance. Below we list all the payroll and tax requirements you’ll need to track, noting whether they are merely federally mandated or whether they might vary down to the state, county, or municipal level.

Minimum Wage

The Fair Labor Standards Act (FLSA) sets a national standard for minimum wage for non-exempt employees.*

Minimum-wage laws can get quite complicated, with variations at the state, county, and city level; they can also vary by company size (for example, 20 or more employees) and age of employee.*

While many companies supporting remote work will be doing so largely for exempt, salaried employees, you will have to be aware of these laws in detail for any remote non-exempt, hourly employees.

Pay Stub

While you do have to maintain records related to payroll, companies are not federally mandated to provide a pay stub,*and the vast majority of people get paid via direct deposit.*

importantPay-stub laws vary by state as regards to whether an employer is required to provide a pay stub, and may dictate what information must be included. Some states will also allow you to make direct deposit mandatory.*

Payday Frequency

The cadence of paydays at your company isn’t federally mandated, but federal laws do say you must keep a consistent pay frequency once you set it. At the state level, you are required to follow any laws regarding paying employees semi-monthly, monthly, weekly or biweekly.*

Final Paycheck

The federal government has no oversight regarding when you send a final paycheck, but states have varying rules about this.* The timeframe may also vary if the employee quits or is fired.

Income Tax Withholding

Income tax is one area of remote work that can be quite complicated. Along with standard federal income-tax requirements,* an employee’s income is taxed at the state level based on a “physical-presence rule,” meaning that employees have to pay taxes for the state in which they reside. Employers will generally also pay taxes on wages paid to these workers to the same state, even if the employer has no physical presence in that state.*

Two notable exceptions to this general rule exist:

  • Reciprocal agreements. In the rare event that someone lives in a state that has a reciprocal agreement with the state where their employer is located, they can file a Certificate of Non-residency, which exempts them from paying taxes in the employer’s state and instead pay taxes in their home state. These states include:

    • Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, Wisconsin, and the District of Columbia
  • Convenience vs. necessity test. Five states—New York, Nebraska, Pennsylvania, Delaware, and New Jersey—may require that workers be taxed based on their employer’s location.* If you work remotely for a company in one of those states, and working from home is a matter of convenience for you rather than a necessity for your employer, you could end up getting taxed twice—for that state and the one you live in (if it has state income taxes).

contributeWe’re unaware of any cases where this has happened to a remote employee, so if you have any experience with this we’d love to hear from you!

FICA (Medicare and Social Security)

This is one area where you don’t have to worry about anything beyond federal regulations. Withholding rates for Medicare and Social Security are set at the federal level* and don’t have any variations at the state or local level. Withholding is split between the employer and employee, but the employer is responsible for processing the withholding on the employee’s behalf.

Workers’ Comp and Disability Insurance Withholding

Workers’ comp is required for any company with one or more employees, but is not a federal program. Benefits are usually paid by a private insurance company or state-run workers’ comp fund.

Disability laws may vary by state, and then by size of company and industry. Five states have laws about disability insurance: California, New Jersey, Rhode Island, Hawaii, and New York.* In New York, paid family leave is included as a rider to the disability benefit, and employers can charge employees for a portion of that coverage.

Unemployment Taxes

The Federal Unemployment Tax Act (FUTA) requires that each state’s taxable wage base must at least equal the FUTA wage base of $7K per employee, although most states’ wage bases exceed the required amount. FUTA is 100% employer-paid.*

State unemployment taxes (SUTA) varies by state. Some states use various formulas to determine the taxable wage base; others use a percentage of the state’s average annual wage; and many simply follow the FUTA wage base. You can download a table of the state rates from the American Payroll Association.

importantEmployers can claim up to 5.4% credit for FUTA, as long as all of the SUTA taxes were paid on time. This deduction reduces the net rate for FUTA to 0.6%.

Tax Deductible Contribution Limits

The IRS dictates the maximum amount that employees can contribute to retirement plans like IRAs and 401Ks. These limits are only mandated at the federal level,* and don’t vary by state.

Overtime

Federal law contains requirements for how overtime is calculated. If state laws are different from federal, the employer must follow the law that is most beneficial for the employee.**

Certain federal laws govern the number and duration of breaks and whether they constitute compensated time or not;* however, implementation of these laws is largely state-specific.* In general, these laws apply to non-exempt or hourly workers. This means that if, say, you hire a customer-service company in California and your company is in Idaho, failure to be aware of and adhere to these laws would expose you to penalties. But for any exempt workers you hire, you don’t have to worry about these laws as they won’t apply.

Taxation of Bonuses

The federal government stipulates that businesses pay a 22% flat tax rate for bonuses,* including signing bonuses, vacation pay, and most other forms of payment that fall outside an employee’s regular paycheck. There also are state-specific variations that apply to employers, including whether or not state income tax needs to be withheld as well.

Registering Your Business

Companies must register as a business with the appropriate federal authorities and with the state tax agency for any state in which it has employees.

Reporting Requirements

Businesses have five types of reporting requirements they must follow:

  • New hire. Report to the appropriate state or federal Department of Health and Human Services within 20 days of the hiring date. Some states may require faster reporting of new hires.

  • Form 941. Federal income tax, Medicare, Social Security, and tipped wages must be reported quarterly.

  • Form 940 (FUTA). File annually by January 31.

  • Wage detail reports. State income taxes, unemployment, and other requirements must be filed quarterly.

  • Year-end W-2s. These must be sent to employees and filed with the Social Security Administration by January 31.

Table: Federal, State, and Local Laws Governing Payroll and Taxes

Payroll and Taxes ChecklistFederalStateCountyCity
Minimum wageYesYesYesYes
Pay stubNoYesNoNo
Payday frequencyYesYesNoNo
Final paycheck rulesNoYesNoNo
Income tax withholdingYesYesYesYes
Medicare and Social Security withholdingYesNoNoNo
Workers’ comp and disability withholdingNoYesNoNo
Unemployment taxesYesYesNoNo
Tax-deductible contribution limitsYesNoNoNo
OvertimeYesYesNoNo
Paid and unpaid breaksYesYesNoNo
Taxation of Bonuses (IRS)YesNoNoNo
Taxation of Equipment Grants?NoNoNoNo
Registering Your BusinessYesYesNoNo
New hire reportingYesYesNoNo
Form 941 (Quarterly Tax Form)YesNoNoNo
Form 940 (FUTA)YesNoNoNo
Wage detail reportsNoYesNoNo
Year-end W-2sYesNoNoNo

Source: Holloway

Further Reading on Payroll and Taxes

Security, Data Protection, and Compliance

When everyone worked in the same office, maintaining good data privacy, security, and compliance practices was fairly straightforward (and the requirements were much simpler!). Everything was stored on central servers; no one lugged their desktop computer home to work for a few more hours; and few people even knew what a “hacker” was. The largely good news for remote workers is that in the intervening few decades, the explosion in smartphones, laptops, and cloud-based services means that most organizations had to rapidly adapt to an increasingly mobile workforce and rapidly changing regulations regarding protecting consumer data.

Given that this guide is largely for startups and high-growth companies, it’s outside our scope to delve beyond the basics of data security and privacy.

What’s important to know is that generally speaking, privacy and security laws apply more to where your customers are, not where your employees are. If you have solid policies and practices for everyone in your company, remote or otherwise, then you should largely be in good shape.

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