Virtual Employees and Payroll Tax Rules
Virtual companies and remote workers are quickly becoming common in the business world. Because of this you may find you have employees spread over many states. Sounds great, right? What about payroll tax? Since each state is a bit different, employers need to make sure to stay on top of the rules in each state they have an employee.
Generally speaking, payroll tax follows the “physical presence” rule. Which means your remote worker will be considered an employee of the state in which he or she lives and works regardless of where your business in located.
For example, a company located in Illinois has a remote worker located in California
- The employee should be paid California wages with California withholding
- The employer needs to register with the California tax agencies in order to properly report the employer wages and withholding
- The employer needs to be aware of California employment rules to ensure they are in compliance with all state laws
If an employee lives in one state but works in another, that employee would have to file taxes in both his or her home state and work state. This is, unless they live and work in neighborly states. Often states that share borders will have a reciprocal agreement which means the employee would only need to pay and file taxes in their home state regardless of where they work. If you live and work in reciprocal states the employee simply needs to fill out a non-resident certificate to be exempted from paying tax in the state where they work. Then present the certificate to the their payroll department to start their withholding in their home state.
If you have employees located in multiple states, a good payroll service can help you navigate the state tax rules, making it easy to have employees in all corners of the country.