Managing Multi-State Payroll: The Complete Guide

Processing multi-state payroll can be a stressful and complicated scenario. The process can be especially challenging if your business wasn’t expecting or prepared to have to handle multi-state payroll. While there’s a lot that can go wrong in this situation, taking appropriate steps in advance can ensure you avoid critical payroll mistakes.
 
Multi-state payroll is the process in which employers must pay employees and withhold and contribute to state taxes for multiple states. The amount of tax and which states employers must process payroll for depends on an employer’s specific situation. Each state’s designated Department of Revenue outlines their specific regulations.
 
Our guide below covers the basics of multi-state payroll, as well as how to identify your obligations. We also explain how partnering with a Professional Employer Organization (PEO) can ease many of the challenges related to multi-state payroll.

 

Table of Contents

1. What is Multi-State Payroll?
2. What is a Tax Nexus?
3. What is a Reciprocity Agreement?
4. Does My Business Need to Register in Other States?
5. Does My Business Need to Pay State Taxes Where My Remote Employees Work?
6. How to Calculate Employer State Tax Withholdings and Contributions
7. How Can a PEO Help With Multi-State Payroll?
8. Get Payroll and Employment Help From the Experts at LandrumHR

 

What Is Multi-State Payroll?

As noted above, multi-state payroll is the scenario in which a business must process employee pay and state tax withholding and contributions for more than one state. This process is in addition to federal withholdings and contributions that are required by the Internal Revenue Service (IRS).
 
Compared to managing payroll for only one state, multi-state payroll requires additional work and planning that can’t be avoided. The more states you’re required to complete payroll for, the more work and planning that is involved. For example, if your business operates in 10 different states, you need accurately calculate, withhold and contribute the correct amount of state taxes for each of the 10 states.
 
State taxes that employers need to be mindful of when it comes multi-state payroll include:

• State Unemployment Tax (SUTA)
• Income Tax
• Disability Fund Tax
• Workers Compensation Tax

 
It’s important to note that each state differs on what taxes are required to be collected and paid by an employer. For instance, some states including Florida and Texas don’t levy an income tax. Each state also differs on the amount of tax required to be withheld, collected or contributed by employers. These are important considerations to keep in mind when it comes to an overall hiring and organizational strategy.

What is a Tax Nexus?

A tax nexus is a threshold established by each state that determines at what point an out-of-state business must register, collect and pay certain state taxes. As noted above, the guideline will be different for each state and needs to be accounted for.
 
A tax nexus can refer to different types of taxes:

• Sales tax
• Income tax
• SUTA
• Workers compensation tax
• And more

 
Typically, the tax nexus threshold is reached when a business has a physical presence within a state. A physical presence can be established via a brick-and-mortar location, warehouse or storefront. However, certain employee activities including remote work, trade show participation/attendance or active sales activity can also establish a physical presence.
 
After a 2018 Supreme Court ruling in South Dakota v. Wayfair, sales tax nexus can also be reached based on ecommerce sales activity as well. The threshold for nexus can be reached based on the total amount of revenue generated and/or the number of transactions. While this ruling doesn’t directly affect multi-state payroll, it’s still an important detail for companies conducting business across multiple states.
 

What is a Reciprocity Agreement?

A reciprocity agreement is an arrangement between two or more states that declares an employer can withhold state taxes from an employee’s resident state if they work in a different state. Generally, this applies to neighboring state scenarios where employees live in one nearby state but work in another. For example, an employee lives in Ohio, but works at a warehouse in Kentucky.
 
Not every state maintains reciprocity agreements. As of July 2022, 17 states have active reciprocity agreements.
 
Some of states with active reciprocity agreements include:

• Arizona
• Indiana
• Kentucky
• Maryland
• Ohio
• Virginia
• Wisconsin

 
It’s also important to note that agreements don’t apply to all neighboring states. For example, Illinois has a reciprocity agreement in place with neighboring states Iowa, Kentucky, Michigan and Wisconsin, but not with Indiana or Missouri.
 
All in all, before hiring employees that live in another state, neighboring or otherwise, it’s important to understand and comply with the appropriate state tax requirements. This also applies to payroll processing in these situations. You need to be clear on which state taxes to process when your business operates in one state, but your employee lives in another.

Does My Business Need to Register in Other States?

If your business conducts any activities that trigger an out-of-states states’ tax nexus rules, you’ll need to complete a foreign qualification for that state. The specific tax nexus triggers and foreign qualification process will vary from state to state.
 
As noted above, some of the common scenarios that can trigger tax nexus in another state include:

• Having a physical location (warehouse, store front, etc.)
• Conducting a certain amount of business; total revenue or number of transactions
• Employing remote workers
• Holding business meetings over a specific time period or a specific number of meetings

 
To play it safe, it’s advisable to consult a business professional such as a Professional Employer Organization (PEO) before venturing into out-of-state business activities. Many PEOs, including LandrumHR, have specific knowledge and experience when it comes to multi-state payroll. Our team of payroll experts can ensure your business is compliant with state and federal tax regulations.
 

Does My Business Need to Pay State Taxes Where My Remote Employees Work?

If your company employs remote workers outside of the state in which your business is registered, you must register in, withhold and contribute, and pay the appropriate state taxes. This requirement applies to each state in which you employ remote workers. The types of state tax and amount that you’ll be required to withhold, contribute to and pay will vary for each state.
 
Being liable for state taxes as part of the multi-state payroll process will having varying levels of impact for companies. Some businesses already have a presence across multiple states which makes the process much simpler. For companies looking to begin hiring remote employees, there can be a steep learning curve.
 
For each new state in which you potentially hire a new remote employee, you’ll need to register with the appropriate state departments in each respective state. Additionally, you’ll need to ensure the correct state taxes are withheld, as well as calculate the proper amount for each one. This venture can be extremely overwhelming for a business with a small payroll team.
 

What About Employees That Travel For Work?

Depending on the nature of the activities that travelling employees are conducting, you may be liable for state taxes. Again, tax nexus rules come into play when determining at what point an employee travelling for work will trigger an employer’s state tax responsibility.
 
Examples where a travelling employee may require a business to register and pay state taxes include:

• Convention/Trade Show Participation- If employees are paid to work at an out-of-state convention or trade show, some states will require employers to comply with state tax regulations. The specific applicable rules will vary from state to state and also depend on certain factors such as length of time worked and nature of business.

 

• Regional Employees- Employees that work across multiple states within a given region will more than likely trigger various state tax rules.  A majority of states trigger state tax regulations when an employee works as a little as a single day in a non-resident state. Other states requirements kick in after a specified amount of time starting at 10 days in some cases.

 

• Out-of-State Trainings-  Some businesses will send groups of employees to one centralized location for company gatherings like trainings. In this scenario, an employer’s state tax obligations will depend on the specific state’s regulations.

 
In all of the above situations and more, reciprocity agreements may come into play and ease the burden for your business. However, it’s best to verify the guidelines ahead of time to avoid unforeseen compliance issues. It’s also important to note that regulations can change over time which makes partnering with an up-to-date, certified PEO a smart decision.

How to Calculate Employer State Tax Withholdings and Contributions

Even after you’ve established your multi-state payroll responsibility, you still need to calculate the specific amount you’re required to withhold and contribute. Depending on your unique situation, this calculation process can range from an hour or two of additional work to multiple hours of complex data entry. Factors such as software implementation and number of states to process payroll for will ultimately determine the best course of action.
 
Using a dedicated payroll processing software is highly advisable in order to accurately calculate state tax withholdings and contributions. A reliable payroll software system will have the appropriate state withholding and contribution amounts built in automatically. In this case, a company representative would simply need to enter the correct number of hours worked for eligible employees and the software would do the rest.
 

How Can a PEO Help With Multi-State Payroll?

Professional Employer Organizations, or PEOs, provide multiple employee management services including payroll processing. The time and resources required to oversee and process employee payroll makes partnering with a PEO a worthwhile investment. For multi-state payroll, this is especially true given the additional complexity and time involved.
 
A PEO can assist with multi-state payroll by:

• Maintaining compliance with state regulations
• Assisting with potential audits
• Processing payroll for each state
• Keeping timesheets in accordance with state requirements
• Managing PTO through a streamlined online system

 
As a general rule, the more states that you have employees working in, the more time and money you can save on multi-state payroll by working with a PEO.
 

Get Payroll and Employment Help From the Experts at LandrumHR

As a business owner, you’ve got enough on your plate to deal with. Adding multi-state payroll to your already long list can be avoided by partnering with LandrumHR.
 
We’re a certified PEO with over 50 years of experience in helping small and medium-sized businesses achieve their goals. Our team of payroll experts have the knowledge needed to tackle any payroll challenge your company is facing.
 
In addition to our hr payroll services, we can also provide you with employee benefits & administration, workforce management, and more. Our full range of services allow us to serve as your one-stop shop for all of your employee management needs.
 
Get in touch with our team today to find out how LandrumHR makes the business of people easier.