Growing a business and managing a team of employees can be a wonderful experience. Getting a good handle on payroll responsibilities can be a bit more challenging. Being in a multi-state payroll situation can make a complex tax even more difficult. Having an understanding of multi-state compliance is a great place to start.
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What is multi-state payroll?
Payroll is a process. You have to calculate each employee’s pay, withhold applicable taxes and deductions, and pay your employee. Multi-state payroll is the exact same process, but it is done in numerous states.
Multi-state payroll can be representative of these types of situations:
- An employee who lives in one state, but works in another
- An employee who works in more than just one state
- A business operating in more than one state
No matter which of these situations fits your business, payroll processing is the same, even though taxes can get tricky.
Guide to Multi-State Payroll Taxes
Multi-state payroll withholding taxes can get confusing. It can be difficult enough to deal with taxes from just one state. Let’s take a look at the taxes you have to withhold, contribute, or both when running payroll.
Federal Taxes
- Federal income tax
- FICA tax (Medicare and Social Security taxes)
- Federal unemployment tax (FUTA)
State Taxes
- State income tax
- State-specific taxes
- State unemployment tax (SUTA)
Multi-state payroll has no impact on calculating federal taxes, it is the same no matter what state. FICA tax and federal unemployment taxes are handled like normal. However, state taxes can get more complicated. You can avoid mistakes and problems by gaining a good understanding of the extra payroll considerations you will need to make.
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State Income Tax Withholding
You withhold state employee tax from their wages and remit it to the state. How do you know how much to withhold? It depends on the employee’s W-4 information and the state’s guidelines. How do you know which state rate to use? In general, you will withhold state taxes based on the state the employee works in.
What if the employee works in a state different from where your business is located?
Withhold state income tax for the employee’s state of residence since your business presence is “nexus.”
What if the employee lives in one state but they work in another state?
In most cases, the state income tax is withheld for the state in which the employee is working. Then, the employee pays their state income tax when they complete their state tax return. However, some states have a reciprocal agreement. If there is a reciprocal agreement between the state the employee lives in and the one they work in, then just withhold taxes for their state of residency. If the two states do not have a reciprocal agreement, you may withhold state income taxes for both the state they reside in and the state they work in. This is called courtesy withholding.
What if your employee works in several states during the year?
You are responsible for withholding and remitting state taxes for the state in which the employee works. Each state has its own tax rules. You may need to handle state income tax for several states, but it depends on how long the employee worked in each state during the year.
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State Unemployment Taxes
State unemployment tax is just an employer tax in most states. This means it is not withheld from employee wages. Three are three exceptions: Alaska, Pennsylvania, and New Jersey. So, where are you supposed to send your SUTA taxes if you deal with multi-state payroll? Pay SUTA tax to only one state for your multi-state employees. The Department of Labor determines which state’s unemployment covers unemployment for an employee. The DOL uses this sequence to determine which state provides unemployment benefits for employees:
- Localization of the services performed. If the employee’s work service is performed in just one state, it receives the SUTA tax from the employer.
- Base of operations. If the employee works in more than one state, do they do some of their work in the state in which the base of operations is located?
- Direction and Control. If the employee doesn’t work in a state where the base of operations is located, do they work in the state in which work is controlled and directed?
- State of Residence. If the employee doesn’t perform their work duties in the state where services are directed and controlled, do they work in the state in which they reside?
Other Types of State-Specific Taxes
When it comes to multi-state payroll, employers have to deal with more than just state unemployment and state income taxes. There are numerous payroll taxes employers need to be familiar with including:
- Contributions for paid family leave
- State disability insurance
- Other taxes specific to each state
Some states have state paid sick leave laws, overtime, double-time laws, and state rules regarding meal and rest breaks. Check with any state(s) your business operates in to ensure you comply with their specific tax and law requirements.
How to Handle Multi-state Payroll Taxes
Multi-state payroll can easily become confusing and overwhelming. There is no need to panic. Employer responsibilities include:
- Registering your business in each state work is performed (if applicable)
- Withholding and remitting state taxes
- Understanding other business implications such as sales tax nexus
Depending on the size and income of your business, hiring a payroll professional may be your better option. They will be familiar with each state’s tax laws and requirements to ensure you are covered and compliant.
