During a recent labor law webinar, Haynsworth Sinkler Boyd’s Chris Gantt-Sorenson and Tyler Gilliam discussed considerations for employers hiring remote workers from abroad. To help employers ensure they comply with the business, tax, and labor laws of various states, Chris and Tyler created the following compliance checklist for out-of-state employees.
1. Requirements for business registration
Employers must always determine whether hiring an employee in a particular state means that the employer is “doing business” in that state. The answer to this question varies from state to state, but often depends on the employee’s role within the company and the services they provide to the company or its customers. Businesses deemed to be “doing business” in a particular state must register with the Secretary of State or equivalent, often by obtaining a Certificate of Authority to Transact Business.
2. Payroll tax requirements and withholding tax considerations
Employers in states with income taxes such as South Carolina have state payroll tax withholding, payment and reporting obligations. Assess payroll tax requirements and register with the state tax authority, if applicable.
What payroll tax requirements (if any) do employers have with respect to remote workers working and/or living in different states? It’s important to both understand the characteristics of your business and get the facts for each remote worker by reviewing and answering the following:
seat of the employer
Where is the employer’s place of business based on the Secretary of State’s filing? You can always check the Secretary of State database or equivalent and search for your company’s legal name to confirm where it is incorporated.
Employer Nexus States
Determine in which states employers have “minimal contacts” to create a “nexus” for tax purposes. “Nexus” corresponds to the minimum degree of contact between a taxpayer and a state sufficient to subject the taxpayer to a state’s fiscal sovereignty.
The answer to this question varies from state to state and therefore requires analysis from state to state. For example, an employer that does business in a state has an affiliation with that state and is subject to that state’s tax laws, even if it does not employ workers in that state. Additionally, the fact that employees in a state are working remotely can also create a nexus. Account for income tax on Nexus state earnings, gross receipts taxes, sales taxes, etc.
problems of reciprocity
Do the state of the employer and the state of work or residence of the employee have a reciprocal agreement? If this is the case, this reciprocity agreement can trump general rules and provide a remedy. As it currently stands, South Carolina has not entered into any reciprocity agreements.
Workers’ Working States (EWS)
What is the work status of the employee? In other words, where is the employee providing services? Consider where the employee’s feet are on the floor when doing the work. It could be more than one state. In order to make these determinations, it is important to understand and track the time allocation that the employee is working down to the percentage of time in different states. Employers with out-of-state remote employees may need to create reporting requirements in a corporate database to properly track this information, or require employees to keep a log of when and where they provide services. This information provides direct information about withholding tax obligations. In some cases, and depending on the state threshold, an employee’s hours worked in a state may bede minimis,“, which in this state call for no restraint.
Worker Residence States (ERS)
In which state or states is the employee resident for tax purposes? It is important for workers to establish residency. If you are unsure, it may be worth creating a questionnaire to determine the tax home for remote or multi-resident employees by asking the following questions:
- Where is your main residence?
- Where is your car registered?
- In which state are you eligible to vote?
- Which state issued your driver’s license?
- For example, how much time do you spend in South Carolina compared to North Carolina?
Suppose you have to withhold in states where workers work more than de minimis amounts. Make sure you register with the tax authorities where you need to have withheld/created Nexus.
3. Register with state unemployment insurance
The Department of Labor’s Localization of Work Provisions created a unified 4-factor test to determine which state should report wages and pay unemployment insurance, although any conflicting state law would override the use of this test.
- Where services are provided
- base of operations
- place of management and control
- residence of the employee
If you have an employee providing services in a state, you must make sure you are registered with that state’s unemployment department and report anything the state requires. State unemployment insurance (UI) tax varies by state, which can reduce FUTA tax liability.
Some states require job development/workforce fund contributions in addition to unemployment insurance, so employers should ensure that there are no additional requirements other than unemployment insurance requirements.
4. Comply with state labor laws
Employers who allow an employee to work remotely outside of the workplace should consider the additional labor law categories:
- State wage laws
- Don’t forget to have an existing employee moving to another state complete a new W-4 and update the payroll company
- employment at will
- Use of AI in recruitment
- Ban the Box Laws
- Pre-employment background checks or drug screenings
- Some states prohibit or restrict testing for marijuana
- insurance requirements
- Public liability insurance, professional liability insurance, commercial vehicle insurance
- Add a new status to the Workers’ Compensation Policy
- healthcare or disability
- Family Vacation Insurance (FLI)
- Paid vacation
- Disability Leave and/or Insurance Requirements
- Jury leave
- workers rights
- H-1B staff
Employers who decide they will proceed with hiring remote workers to work out of state should also enter into written remote work agreements that clearly outline expectations regarding these aspects:
- Written agreement with the employee approved for remote work and conditions under which it can be revoked
- Device Usage Policy
- Confirming the agreement does not change the arbitrary nature of the employment relationship
- Timekeeping regulations for employees who are not on leave
- Software Usage Policy
Employers are well advised to consider a number of factors before deciding to hire employees out of state, such as: B. how remote work would affect productivity and organizational efficiency, security and privacy concerns, and overall employee satisfaction. Finally, because workers at some companies could potentially start remote work in another state without notifying the employer, an employer should also require workers to notify the employer before the employee begins remote work from another state.