Multi-State Payroll: Employer Guide to Compliance and Tax Regulations

The term “multi-state payroll” tends to conjure images of large corporations with a plethora of employees in many locations across the United States. While this is true for some employers, a multi-state payroll also applies to smaller employers with employees in different states. Ultimately, if multiple states are involved, you need to do multi-state payroll. Read on for insight into multi-state payroll — including what it means for employers, plus:

• Federal, state, and local wage and hour laws
• Payroll tax laws
• Reciprocal tax agreements
• Time and labor
• Tips for compliance

What does multi-state payroll mean for employers?

Multi-state payroll is about managing payroll for employees in different states. This includes paying wages, withholding and reporting taxes, and administering benefits for employees in multiple states. Multi-state payroll applies if:

• Your business operates in multiple states
• An employee works in more than 1 state, or travels between states
• An employee lives in 1 state and works in another

When it comes to multi-state payroll, employment/payroll taxes tend to get all the shine. Basically, payroll taxes are 1 of the main reasons why some employers fear multi-state payroll. It’s not hard to see why: Payroll taxes can get extremely thorny when more than 1 state is involved. However, there are many other regulatory factors (besides taxes) that contribute to the complex nature of multi-state payroll, including wage and hour laws.

Navigating federal, state, and local wage and hour laws

To pay multi-state employees appropriately, you must adhere to applicable federal, state, and local wage and hour laws. On the federal front, most employers must follow the Fair Labor Standards Act (FLSA), which governs private-sector workplaces.

The FLSA regulates:

• Federal minimum wage
• Federal overtime
• Hours worked
• Record keeping
• Child labor

Regardless of where you do business or where your employees work, you must likely comply with the FLSA. This is a straightforward, universal rule for employers.

However, things aren’t so simple on the state side

State employment laws vary. So, you will need to ensure you’re interpreting and complying with the correct state wage and hour laws for your multi-state employees. Oftentimes, this means complying with the laws governing where you do business or where your employees work. For example, if you have locations in California, New York, and Florida, you must follow:

• California’s wage and hour laws for your California employees.
• New York’s wage and hour laws for your New York employees.
• Florida’s wage and hour laws for your Florida employees.

But there are times when an employee’s home state laws may apply, such as when the employee travels between states to get to work. Additionally, some localities have their own wage and hour laws, which make things even more complicated if you have employees in different cities, counties, or towns.

Federal vs state or local wage and hour laws

Generally, if an employee is subject to federal, state, and local wage and hour laws, you should use the law most favorable to the employee. That said, it’s best to have your legal team do the legal analyzing and interpreting. They can let you know which federal, state, and local wage and hour laws you should obey, plus help you draft relevant policies and procedures. Your legal team can also identify other types of applicable state or local pay-related laws, such as paid sick leave, pay transparency, and pay equity laws.

Important things to know about multi-state payroll taxes

As mentioned, this is the most visible facet of multi-state payroll. In general, state payroll tax laws are known for their complexity. But when they involve federal tax laws plus multiple states and localities, the complexity factor rises to another level. When done improperly, multi-state payroll taxes can result in not only incorrect employee tax withholdings but also payroll tax reporting errors for different states and localities. Correcting these issues can be exorbitantly time-consuming — not to mention the governmental penalties that can be imposed on the employer.

Here are some important things to know about multi-state payroll taxes:

• Most states require employers to withhold state income tax for the state in which the employee performs the work. (Note that 9 states do not require state income tax withholding.)
• If the employee works and lives in the same state, the employer simply withholds state income tax for that singular state. But if the employee lives and works in different states, the employer might need to withhold taxes for both the work and home states.
• If the employer has a business presence (known as “nexus”) in the employee’s home state, they may need to withhold state income tax for the home state, even if the employee does not work there.

According to 1 expert, “If an employee lives in one state and works in another, the employer is responsible for withholding tax for both states if it has nexus in both states, but the work state takes priority, with many states allowing employees credits for taxes withheld in other states.”

Reciprocal tax agreements

State reciprocal tax agreements allow employees who work and live in different states to not get double-taxed. If there’s a reciprocal agreement, you can withhold taxes for only the employee’s home state. But if there’s no reciprocal agreement, then you may need to withhold state income tax from both the employee’s work and home states.

Local payroll taxes

Some localities require employers to withhold local payroll taxes based on where the employee works or lives. For example, Ohio employers must withhold school district tax from Ohio residents who live in a taxing school district.

“Convenience of the employer” rule

The escalation of remote work has caused a few states to adopt the “convenience of the employer rule.” Under this rule, remote employees working for an employer located in a different state are subject to the payroll tax laws of their employer’s state.

There are many layers to multi-state payroll taxes, and things can get confusing fast without proper guidance.

Employees who work for employers that must follow the “convenience of the employer rule” are often subject to double taxation — meaning they must pay taxes to both their home and work states. As you can see, there are many layers to multi-state payroll taxes, and things can get confusing fast without proper guidance. Keep in mind, as well, some states require more than just state income tax withholding. For example, you may need to withhold state disability insurance tax or state unemployment tax from multi-state employees’ wages.

Time and labor

To pay your multi-state nonexempt employees accurately, you will need to establish timekeeping best practices. This includes utilizing a time and labor solution that lets you seamlessly capture hours worked, across states. Make sure the technology is set up to administer minimum wage, overtime, record keeping, and other payroll requirements for employees in different states.

5 quick tips for achieving multi-state payroll compliance

Multi-state payroll is a process that requires careful analysis and application of all the necessary laws, including those relating to wages and hours, payroll taxes, and timekeeping. While this may seem daunting, a well-mounted system can make the process go smoothly. Here are 5 quick tips for obtaining multi-state payroll compliance:

• Keep track of where your employees work and live.
• Research the payroll laws for each state and locality in which you have employees. Also, don’t forget about federal payroll laws.
• Work with your legal and tax teams to develop air-tight policies and procedures regarding multi-state employment and payroll management.
• Hire knowledgeable payroll professionals to administer your multi-state payroll. They should have expertise in multi-state timekeeping, wages and hours, employee benefits, employee leave, paycheck deductions, employment taxes, record keeping, and more.
• Use integrated payroll technology that supports multi-state compliance.

Do you have employees in different states? See how TriNet's managed payroll services can help.