Question: We are going to hire remote employees in several different states. What must we consider from a tax and employment law perspective?
Answer: Generally, employers must comply with the labor law of the state in which the employee will be regularly performing services and where wages are paid to that employee. There is a common rule of thumb called “boots on the ground,” which implies the regulations would apply to the state where the employee is physically working, including wage and labor regulations for hours worked and overtime, as well as general fair employment practices, termination/final pay rules, and recordkeeping. From an employee perspective, income tax for the state where the employee works (as well as lives) falls under each individual state as well. Note too, that the state where the employee works is generally where the employer should be paying unemployment insurance tax and workers’ compensation coverage.
We recommend additional research with tax and legal experts when expanding into a new state, even with remote workers. The following information offers more details about unemployment taxes and new hire reporting.
Unemployment Taxes (UI)
In many cases, employers should apply the standards of the state where the employee works and resides (where their “boots” rest). However, an employer could also choose to select the requirements of the most generous state in which the business operates or follow the requirements of a more generous internal policy, and apply those rules consistently across all company locations.
Most states will allow a multistate company to pay UI taxes from one location, though this does still require registering with each state and getting approval.
In most states, UI taxes can be paid for all employees under a Reciprocal Coverage Agreement (RCA) in which UI is paid to only one state (i.e. the company’s headquarters) when an employer has employees in multiple states. It appears approval must be sought by each state for each employee for this to occur; however, it can at least provide the company the avenue of paying the unemployment taxes only from one state for all employees working from home in other states.
New Hire Reporting
An employer with employees in more than one state has two options in fulfilling new-hire reporting requirements. Multistate employers may choose either of the following:
- Abide by the new-hire reporting program of each state and report newly hired employees to the various states in which employees are working.
- Select one state where employees are working and report all new hires to that state’s designated new-hire reporting office.
Multistate employers who opt to report to only one state must submit new-hire reports electronically or magnetically. These employers must also notify the federal Department of Health and Human Services as to which state they have designated to receive all their new-hire information. The National Directory of New Hires then maintains a list of multistate employers who have elected to use single-state notification.
When notifying the department, the multistate employer must include all generally required reporting information along with the following:
- The specific state selected for reporting purposes.
- Other states in which the company has employees.
- A corporate contact person.
- A list of the names, Employer Identification Numbers (EINs), and the states where the employees are located if the company is reporting new hires on behalf of subsidiaries operating under different names and EINs.