So Your Employee Wants to Work Out of State

Q: I am an HR administrator. We employ remote employees, and we are looking at options for full-time employment for one of our staff members who has relocated to Florida.

Thank you to a client for for that great question! Since the beginning of the COVID-19 pandemic, many employees have begun working remotely, leaving employers with questions about what they need to do to remain compliant if one of their employees wants to work out of state. While there can definitely be benefits to employing remote workers—such as having access to a wider talent pool—there can be a lot of challenges as well. We’ll tell you what your business will need to do to stay compliant if your employee moves out of state.

Foreign Qualification

Even if your actual company is based elsewhere, if you have an employee working full-time in another state, the law will probably consider you to be “doing business” in that state, meaning you’d need to register with the state as a foreign (out-of-state) business—a process called foreign qualification. This process typically involves filing paperwork with the secretary of state (or equivalent agency), paying business taxes, keeping up with state compliance filings (such as annual reports), and maintaining a registered agent in that state.

Can I list my employee as the registered agent in that state?

You can, as long as your employee accepts the responsibility of being the registered agent. Keep in mind that a registered agent must list their address publicly and be available to accept service of process in person during business hours. Your employee might not be comfortable listing their home address on the public record. One way to avoid these privacy concerns (and save yourself the trouble of hiring multiple registered agents) is to hire a national registered agent service with offices in all fifty states—What a coincidence! We’re a national registered agent service!

Payroll Requirements for Withholding Income Tax

In most cases, employees are required to pay income tax in the state where the work is performed. So if your company is based in Washington State, but your employee works remotely in Oregon, he or she would need to pay income tax to the state of Oregon, and you, as the employer, would need to withhold that tax from his or her paychecks.

However, there are exceptions to this rule. Certain states have what are called reciprocal agreements, meaning that an employee in one of these states can pay taxes only where they live, not where they work. For example, since New Jersey and Pennsylvania have a reciprocal agreement, an employee who lives in Pennsylvania and commutes to New Jersey for work would pay income tax in Pennsylvania and not in New Jersey. On the other hand, in certain states, a remote worker would be required to pay state income tax both in the state where they live and in the state where their company is based.

As you can guess, handling payroll for remote workers gets complicated quickly, meaning it’s a good idea to consult a CPA before you allow your employees to work out-of-state.

Business Taxes for Out-of-State Employers

Not only will your employee probably need to pay taxes in the state where they work, but your business might also need to pay state and local business taxes in that state. Many states have a sales and use tax that businesses with a tax nexus (physical presence) in the state need to pay. If you have a C-corporation, you may also need to pay corporate income tax in that state.

State Employment Laws

Different states and counties have different labor laws, and you’ll need to follow the labor laws of the state where your employee is working. Here are some labor laws to be aware of that vary by state:

• Paid sick leave
• Paid family leave
• Minimum wage
• Meal and rest break requirements
• Overtime requirements

Business Insurance

You’ll probably be required to purchase insurance for your employees in the state where they are working. Here are the two most common types of required insurance:

Workers’ Compensation Insurance

Workers’ compensation insurance provides medical and wage benefits to employees who are injured on the job, and it’s a legal requirement for most employees in all states, although the specific requirements vary.

Unemployment Insurance

Employers almost always need to register with the unemployment insurance program of the state where their employee is working. The amount you need to pay will depend on the state and the size of your company.

Business permits

You should also find out if your employee’s state or county requires a home occupation permit for remote workers. This is a permit to conduct business out of your home, and it’s required in many municipalities.

Is one of your employees interested in working remote from another country? Check out our page, What to Do if Your Employee Wants to Move Abroad.