How to Hire Out-of-State Employees

When your business is in the hiring mode, it is difficult enough for your HR staff to comply with the federal laws and regulations from the state where you do business. You add another level of complexity to HR duties when you hire employees from outside of your business’s home state.  

You can characterize these additional issues as those that arise during the “pre-hiring,” “hiring,” and “post-hiring” phases. 

What Considerations Arise During the Pre-Hiring Phase? 

Whether you decide to launch an out-of-state location or hire workers from out of your business’s home state, there are specific steps you must take.  

Each state has its own rules regarding the employee hiring process and continuous employment procedures. Here are a few government agencies that require you to register your company’s activities:  

• Secretary of State.  Inform the employee’s home state of your intent to do business within the foreign state and your intent to comply with all the state’s laws and regulations. States require that you designate a registered agent who maintains an office in that jurisdiction. A mere post office box is not enough to satisfy the state regulations. The authorization form is called a Foreign Qualification. 
• Department of Revenue. Every state makes its own rules and regulations regarding state, local, and municipal taxes and the required filing deadlines.  
  • Your prospective employees may file for a tax exemption for those states that have reciprocal tax agreements with your business’s home state. If granted, the exemption allows you to withhold state taxes only for the employee’s home state. 
  • You also need to apply for an employee’s state of residence ID tax number, so you can file the required state forms and pay the appropriate taxes. 
  • Research whether the state requires disability and workers’ compensation insurance. 
• Employment Security Department.  You should apply for an unemployment insurance account from the employee’s state of residence, so you can file the appropriate unemployment returns and pay the required taxes. 
• U.S. Department of Homeland Security. The U.S. Department of Homeland Security (DHS) requires employees to complete an Employment Eligibility Verification (Form I-9). Form I-9 verifies that the employees are who they say they are and that U.S. laws allow them to work here. The employees must complete Forms I-9 in person before your company’s representative, who reviews their documents. Alternatively, the employees may sign in front of a notary. 
• U.S. Department of Health and Human Services (HHS). Many states require that foreign companies register with the state for purposes of enforcing child support laws. If you hire employees from multiple states, you should pick one to which you will report all new hires. This consolidates the “new hire” process, but you must notify HHS in writing that you are a multiple state employer. 

What Is Required During the Hiring Phase? 

There are several steps to follow during the hiring phase, as shown below:  

• Applications. Your employment applications must comply with local, state, and federal regulations. Each state makes its own rules regarding nondiscrimination in employment, fair hiring legislation, background investigations, drug tests, and references. Each state may have its own rules on legal disclosures, Social Security ID numbers, emergency contacts, use and access to credit reports, and transportation access. 
• Other legal considerations.  Many states have laws and regulations regarding child labor practices, immigration and employment verification, rules restricting interview areas, and lie detectors. 
• Maintaining documents. States are also free to make rules about retaining employee documents in employee records, new hire reports, and using public records in the hiring process. 
• Required Forms.  States are free to require specific forms during the hiring process, such as evidence of disability, health insurance, workers’ compensation, and sexual harassment complaint forms. 

What Is Required in the Post-Hiring Period?   

Once you hire an employee, a whole set of rules applies concerning compensation. For instance, the state’s minimum wage rules apply.  The federal minimum wage rule is $7.25 per hour for hourly employees. Each state can adopt minimum wage laws that are lower than, match, or exceed the federal minimum. In a state with no minimum wage rules, the federal rule applies.  

Each state can also decide how often you may pay your employees. Most jurisdictions require employees receive compensation either weekly, bi-weekly, semi-monthly, or monthly. State rules are free to adopt more specific payment rules. In 2021, only three states have no frequency rule: Alabama, Florida, and South Carolina. 

Pay stubs are a state issue where no federal rule applies. Some states do not require pay stubs. Other states allow companies to choose whether they will give paper or electronic pay stubs. Others require that employees have easy access to pay stubs that are printable. The type of information that must appear on pay stubs also varies state by state. 

Other hiring considerations.   

Both federal and state laws apply to the following payment issues: 

• Overtime. Some states base overtime on the number of hours worked in a week. Others base overtime on the number of hours worked in a day. States may also vary on the rate of overtime that applies. If a state has no overtime rules, then the federal overtime rules apply as shown in the Fair Labor Standards Act (FLSA). 
• Fair Workweek Rules.  Some states adopted rules that require employers to give employees fair notice ahead of their schedules. States may also require predictability pay when a schedule changes. 

What Are Some Specific Multi-state Payroll Issues? 

At the federal level, each employer must withhold federal income tax, the employer and employee share of Social Security and Medicare taxes, and the Federal Unemployment Tax (FUTA). 

State payroll withholding responsibilities may include: 

• State income tax withholding - dual state employees are taxed where they live and work. In reciprocal states, the employer may deduct the taxes only where they work. 
• State unemployment benefits - in states that require employee contributions to state unemployment funds, you must withhold the payments from their pay and send the money to the state. 
• Temporary disability - states with a temporary disability fund require employers to deduct the payments from employee wages and send the payments to the state. 
• Paid Family and Medical Leave (FMLA) - in states with paid FMLA, the state may require you to deduct the employee contributions from employee wages and send the payments to the state. 

In addition, HR staff may need to determine the amount of compensation that applies to each state when an employee splits their time in different states. In these cases, you will need to register with each state taxing authority, calculate the appropriate tax withholding, and make sure the deposits are made promptly. In addition, HR staff may need to determine employees’ proper classification, that is, employees versus independent contractors. Income tax withholding is not required for independent contractors. 

These complex duties may burden the load for in-house HR staff. 

Take the Next Step 

We have good news; you can eliminate the complexities of hiring out-of-state workers. The answer is to hire a Professional Employer Organization (PEO) to handle the issues for you.

A PEO has the trained staff to ensure compliance with pre-hiring, hiring, or post-hiring regulations. The PEO keeps on top of laws specific to each state. The PEO staff does payroll calculations and deductions for you, so you don’t have to keep track of multi-state withholding.