HR Guide to Out-of-State Employees
Remote work is a flexible arrangement where employees are eligible to work out of their home or an office that is not connected to the organization. Remote employees are typically able to complete their job functions without being physically located in an office with other employees.
Common remote positions include web development, copywriting, social media marketing, and customer support specialists, and many others. Even beyond this list, there are a myriad of positions capable of working remotely. Working remotely can be an enticing option both to employees and employers alike.
What are the benefits and challenges of employees working remotely?
The most common benefit of remote working is less overhead cost on office space. Employers can save money by having more employees working remotely. According to SHRM, this also opens up new recruitment strategy options. Remaining unbiased toward employee location can open up your hiring pool by a large margin.
If employees are working remotely, then they may not always update their employer of living changes. This can cause complications for employers, who are offering say health benefits that may be attached to a specific area. It is crucial for employees to inform their employers of any new living arrangements right away, so as to maintain their health benefits. It is quite possible for health claims to be denied if the medical help was received outside of the health plan provider network.
Employers opting for a remote worker option will need to set up specific benefit packages to accommodate those remote employees. Utilizing telemedicine may be a good alternative for employees living in more rural locations. Employers are going to be tasked with accommodating more dispersed employees. These will present their own set of issues as well. For instance, telemedicine benefits may be limited depending on the different state regulations.
Are remote employees allowed to live and work out of state?
According to SHRM, since the beginning of the COVID-19 pandemic, 28 percent of employees have been working out of state. Of this percentage, only one-third reported this change to their employers. This can pose large risks for employers who failed to withhold the proper amount of taxes. If the company receives an audit, then they can be penalized for this error.
Many HR departments feel unprepared for this sort of work from home shift. While most employers support the change, HR dwells on the compliance-related complications involved.
According to SHRM, 93 percent of HR professionals were confident in where their employees were working, while only 33 percent of employees claimed to have reported those living arrangements.
While employees are allowed to work out of state should their employer allow it, they must follow the correct guidelines as far as compliance is concerned. It is now critical for employers to monitor their policies and employee living arrangements well beyond the implementation of said policies and arrangements.
How Can Employers Combat Tax Repercussions?
Companies are permitted to create a nexus outside of their historical location in order to handle more remote employees. SHRM describes a nexus in tax law terms as simply the presence of said business in a state or locality. There are also registration requirements and numerous tax implications that may need to be either paid or withheld.
If an employee wishes to work outside of say, a highly taxed state, it could bode well for an employer and actually save them quite a bit of money. During the pandemic many states allowed businesses leeway on employees working out of state, however that relief was only temporary. Businesses will need to adapt their policies in order to remain compliant during this shift to remote work.
Are Employers Required to Withhold Out of State Taxes?
As far as employees paying income tax based as a nonresident worker or as an out of state employee, that is going to vary widely based on state law. According to How Stuff Works, the Supreme Court has outlawed any two states collecting taxes on the exact same income. For instance, if you live in Tennessee, but make your living in Kentucky, then you cannot be taxed by both states. As far as which state does receive the taxes will again, depend on the state.
There are sixteen states who have reciprocity agreements, meaning that they have a tax agreement with a nearby state to allow those states to claim the taxes despite the employee earning the money in their state. Some states will tax employees under a “first day” rule, which means that nonresident workers will still owe the taxes despite not living in the state. Other states won't tax nonresidents at all.
How Should Employers Handle Out of State Employees?
The tax requirements simply differ by state and so it is crucial to understand the requirements of the state in which your organization operates, as well as the home state of your employees. If you are moving to a work from home setting then it is a good idea to inform all employees of the regulations and requirements for working out of state. Stay up to date on the living situations for all employees, so that you are able to offer them the correct benefits packages, as well as avoid any sort of tax penalties for you and your employees.
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