The world of work has changed. It’s estimated that 25% of American workers now work remotely. And, flexible work is the third most requested benefit according to a recent poll by SHRM. For many employers this arrangement isn’t a problem at all; however, understanding how the taxes work for employees in different states can be a bit more complicated.
If you have remote employees and are wondering how to pay them and prevent double taxation, while still complying with tax rules, you’re not alone. Fortunately, several states have already considered this, and we’ve assembled some facts and resources to help. Read on to learn more about what to do for your employees in this situation.
What is Double Taxation?
Double taxation occurs when employees are taxed twice on the same income by two states. This can happen when an employee works in one state but resides in another.
In order to prevent this, some states have entered into a state reciprocal agreement. However, most states are not in a reciprocal agreement; which can make things a bit complicated.
What is An Example of Double Taxation
If your remote worker lives in Indiana and works remotely for your business in Ohio, they would normally have to pay taxes to both states.
However, since Indiana and Ohio have a State Reciprocal Agreement, your employee would only have to pay taxes to their home state of Indiana.
If you have a remote workforce, it’s important to be aware of these agreements so that you can withhold the correct amount of taxes from your employee’s paychecks.
How Do You Prevent Double Taxation?
Employees who work remotely are often unaware of whether or not there is a state reciprocal agreement, which could lead to double taxation, and unexpected expenses during tax season.
If your employee lives in a different state than where your business is headquartered, or where the employee performs their duties, you may run into issues with double taxation.
In an ideal world, there would be a state reciprocal agreement in place to prevent double taxation. If a state reciprocal agreement is not in place, you will need to withhold taxes based on where their services are rendered.
If the employee ends up paying for work in multiple states, then they must save their tax information to receive a tax credit in their home state.
What is a State Reciprocal Agreement?
State Reciprocal Agreements are agreements between two states that allow residents of another state to only pay taxes in their home state where they are considered a resident, and prevent double taxation. This sets out how income earned by residents of one state will be taxed by the other state.
If you have employees who work in multiple states, it’s important to be aware of these reciprocal agreements. This will help you avoid withholding too much or too little tax from your employees’ paychecks.
States with Double Taxation Agreements
| State | Reciprocal Agreement |
|---|---|
| District of Columbia | Maryland, Virginia |
| Illinois | Iowa, Kentucky, Michigan, Wisconsin |
| Indiana | Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin |
| Iowa | Illinois |
| Kentucky | Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin |
| Maryland | D.C., Pennsylvania, Virginia, West Virginia |
| Michigan | Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin |
| Minnesota | Michigan, North Dakota |
| North Dakota | Minnesota, Montana |
| Ohio | Indiana, Kentucky, Michigan, Pennsylvania, West Virginia |
| Pennsylvania | Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia |
| Virginia | D.C. Kentucky, Maryland, Pennsylvania, West Virginia |
| West Virginia | Kentucky, Maryland, Ohio, Pennsylvania, Virginia |
| Wisconsin | Illinois, Indiana, Kentucky, Michigan |
How Do You Pay Remote Employees?
You need to know whether or not your employee is considered a resident of the state in which they are working. You also need to know the tax rules of that state. If there is a state reciprocal agreement in place, then they are taxed only in their home state vs. the state in which the work is done.
Once you have determined residency, you can determine which state the taxes are withheld from. For example, if there is no agreement in place, then they are taxed in the state where the work duties take place. They may also have to pay taxes in their home state.
How to Pay Remote Workers Compliantly
Employers should let their employees know upfront about the tax laws if they are in a separate state. This allows them to be prepared when tax season comes if there is not a reciprocal agreement in place, and they can work with their local tax authority.
Make sure you are withholding the appropriate taxes from their paychecks. Each state has different tax requirements, so be sure to research the tax laws in the state where your employee resides.
Be sure to send your remote worker the appropriate tax forms at the end of the year. This will allow them to properly file their taxes. You may also be able to withhold more taxes for your remote workers if they want to avoid paying more taxes to their home state when a reciprocal agreement is not in place.
How to Calculate Employer And Employee Contributions for Remote Workers
Determining how contributions should be handled has become even more complicated. That varies depending on the jurisdiction the remote employee resides in; and requires knowledge of taxes in each state. It is best to work with a payroll provider, such as Paycor, to do this automatically for you.
How Can Paycor Help
Paycor helps your HR team with the complexity of figuring out how to prevent double taxation by managing taxes for your remote workforce based on the “live in” and “work in” laws. Using Paycor for payroll, which now includes tax recommendations, helps ensure that your employees are paid accurately and that their taxes are filed correctly. This can help reduce the chances of double taxation and ensure that your employees are taken care of properly.
Discover how Paycor can help streamline your remote workforce needs.
