Multi-state Taxation: What to Know as an Employer

MAR 12, 2024

Multi-state Taxation: What to Know as an Employer

In today’s business world, many businesses have found it’s more profitable, efficient, and better for staff morale to adopt a long-distance employment policy. Remote work and hybrid work (i.e. work done both remotely and in-office) has taken off, and is proving a viable way to operate. An October 2023 report from Business News Daily says in a poll of 1,000 remote and hybrid workers, 40% work longer hours at home than at the office, 75% reported an improvement to their work-life balance, and only 29% reported feeling “moderately stressed” while working remotely, and only 15% felt “extremely stressed.”  

But remote and hybrid work models do have their challenges. When employers have staff in more than one state, they have to deal with more than one set of tax regulations and laws. Dealing with taxes in multiple states can be a complicated matter, but not an insurmountable one. In this blog, we’ll take a closer look at this kind of taxation and how to deal with it.    

Understanding Multi-State Taxation

Multi-state taxation refers to the taxation of income or property that crosses state lines. Employers with remote employees or employees who commute across state lines are the primary subjects of this form of taxation. These employers are responsible for registering in each state in which they operate. To register, an employer usually has to have a nexus in that state. This nexus can be one of several types:  

• Physical - a store or office in the state.
• Economic – a certain level of economic activity in a state.  
• Affiliate – a relationship with another business that has a physical presence in the state.  
• Click-through – a relationship with a third-party seller or referral agent in the state.  

Employers are also responsible for collecting the appropriate state taxes and remitting these taxes to each appropriate state.  

Employees are also affected by this type of taxation. They may be subjected to state income taxes from both their state of residence and state of employment. However, certain states have reciprocal agreements, which allow employees who work in other states to only pay taxes in their home state. It’s up to an employer to know which states they operate in have such agreements, and with whom.  

Multi-State Compliance

To comply with multi-state taxation regulations, employers must establish a nexus in each state in which they operate (or determine which states they have a non-physical nexus in). They must register in each of these states for taxation purposes. Employers must also make sure they keep careful records of the relevant operational data that both the federal and state governments will require, such as employee wages and hours worked.  

Employers must also be sure they withhold the correct amounts for all applicable taxes for each employee. These taxes may include the following:  

• Federal and state income taxes.  
• Federal and state unemployment taxes.  
• Social Security taxes.  
• Medicare taxes.  
• Disability fund taxes.  
• Workers’ compensation taxes. 

Outsourcing Payroll Work

Employers with staff and/or operations in multiple states has their work cut out for them trying to run a payroll system. They have multiple sets of state tax laws to follow and comply with, different sets of calculations to run, and multiple departments to provide tax record information. All this work, coupled with the risk of tax audits and legal fines if mistakes are made, can make for a stressful burden on any employer.  

Hiring a third-party payroll service provider, like Payroll Vault, can alleviate a lot of the trouble. A good payroll service can be an employer’s personal multi-state taxation guide, doing the heavy lifting when it comes to tax filing and showing an employer the way through the parts the employer needs to do themselves. A payroll service provider has the expertise on hand to make sure each employee’s taxes are calculated correctly and all applicable tax laws are followed. This leaves employers free to focus on the reason they got into their respective lines of business: to pursue their passions, serve their customers, and provide a fulfilling place to work for their staff.  

Ease Your Payroll Burden with Payroll Vault

We’re happy to offer you solutions for your payroll, tax filing, and HR needs. Our boutique-style payroll company can provide you with a customized service, from sending out payroll to helping you file your taxes, to performing background checks for your hiring process. Visit your nearest Payroll Vault location today to find out more about what we can do for your business.