Business Insights

Tax Considerations for Hiring Out-of-State Workers

In a tight labor market, hiring out-of-state workers may have its benefits, but it’s not without risk. Here’s what employers need to know.

With a rise in remote-first work and an increasingly tight labor market, some employers are opting to hire candidates from outside state lines.

For employers — particularly those in smaller markets — casting a wider net can help them reach a broader talent pool and engage the top talent in their industry, regardless of location. This is a win in today’s highly competitive labor market. Likewise, hiring employees in other localities can often help employers build a more diverse workforce and bring in fresh perspectives.

While hiring out of state can provide an array of benefits, there are a few nuances and potential complications employers must be aware of before expanding their search beyond state lines.

Potential Tax Implications

If you’re thinking of hiring out-of-state workers — or if you already have some on the payroll — it’s critical that you know where they reside because you may be subject to that state’s tax rules surrounding payroll tax withholdings. In some states, having one full-time employee working within the state may be enough to create a tax nexus, which is a situation where a business presence within the state necessitates that the business pays the taxes required by that state. The same concerns are relevant to local tax rules at municipal and county levels. This can lead to additional state and local-level compliance measures regarding sales and use taxes and gross receipts taxes.

Local Labor and Employment Laws

As a general rule, employees are subject to the labor and employment laws of the city, county and state in which they perform their work. While there are some exceptions, employers should consider the nuances in state and local labor and employment laws before hiring any out-of-state employees. Some employment laws that may vary by locality include those related to wages per hour, termination of employment, and sick and family leave. To avoid risking noncompliance with any state or local laws, employers should do their due diligence and research the state and local rules, especially those associated with workers’ compensation insurance and unemployment insurance.

Foreign Qualification

Depending on the state you’re hiring in, you may need to acquire a foreign qualification. Once you obtain this qualification — which typically requires registering with a Secretary of State’s office — you’ll be eligible for a certificate of authority. This certificate is a requirement in most states, though it may be called by another name. Hiring staff across state lines means you’re “doing business” in another state, and getting this authorization signals that you’re legally able to conduct business. There may also be local licensing requirements. Without these, you could be liable for fines, penalty fees, back taxes, and other penalties.

From filling needed vacancies to gaining new cultural perspectives, hiring out-of-state employees can benefit employers in a number of ways. But as you hire new talent, don’t forget to tap your legal, accounting, and human resources teams to ensure you remain in compliance with all applicable laws and requirements.