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Hiring remote workers

2020 has fundamentally changed how jobs are performed, and where people are getting their work done. The work location you enter in Gusto for a new hire depends on several things: where your employees decide to live and work, how long they’ll live or work in a given state, if the states have reciprocity, and a variety of other factors. 

Understanding these dependencies can sometimes feel like a challenge, but we’re here to help.

Employee work location

In most cases, you’re required to withhold taxes in the state where your employee physically works—which can either be their resident or non-resident state.

  • Resident state: This is your worker’s permanent home address.
  • Non-resident state: This is any state that your worker commutes to for work or works in for a short amount of time, but it’s not their permanent home.

Preparation for hiring a remote worker

The golden rule is that taxes are owed in the place where work is done. When preparing to hire a remote worker in a new state, you’ll usually need to register with at least one state tax agency (and possibly others)—so it’s important to understand your withholding obligations in that state. 

COVID-19 reminder: the federal government hasn’t given guidance on how to treat temporary moves due to COVID. Accordingly, each state (and sometimes city) is handling them as they see fit. Learn which states are relaxing the rules so you don't need to withhold payroll taxes for employees temporarily working in a new state as a result of COVID.

For employees who work and live out of state

State laws vary. If you have employees working in another state, you’ll need to understand that state’s legislation to determine if an individual’s “work” address should be listed there, or you can consult a legal or tax advisor who can help you.

How to handle this in Gusto

  1. Make sure your employee’s home address is correct.
  2. Make sure your employee’s work address accurately reflects where the work is being done.
    • To edit an employee's work address, administrators should first add the new address to their company account in the Company Details section.
      • Important note: If you’re adding a work location in a new state, you'll also need to register for payroll taxes in that state. Adding a new work location before you've registered and received an account number may block payroll.
  3. In states with both withholding and unemployment requirements, you’ll need to register for both. Head to the State Tax Registration section of our Help Center and follow the steps to register in the new state.

For employees who live out of state, but work in your business’ state(s)

Here too, the golden rule is that taxes are owed to the state where the work is done. But—some states have agreements that allow employees who work in one state and live in another to only pay income taxes to their state of residency (aka their home state). This is called a reciprocal agreement. Whether the states you’re dealing with have these agreements could affect an employee’s income tax withholdings.

How to handle reciprocal agreements in Gusto

To be able to withhold and pay income taxes on your employees’ behalf in their home state, your business needs to register for a withholding account in that state.

  1. Check to see what states have reciprocal agreements here
  2. Follow the steps in this article to set up reciprocity.
    • This article also includes resources about how to register to do business in a new state.

What if the home state and work state don’t have reciprocity?

If the two states do not have reciprocity, Gusto will withhold income tax (and unemployment, too) in the employee’s work state in Gusto. This means Gusto withholds income tax only from their non-resident state. 

Because some employees must pay non-resident income taxes for the state where they work and resident income taxes for the state where they live (therefore filing personal income tax returns for both states), you as the employer are able to help facilitate the withholding of home state incomes taxes in Gusto.

To withhold income taxes in an employee’s home state, in addition to the taxes being withheld in their work state, set up courtesy withholding in Gusto.

  • Note: In order to accommodate courtesy withholding, your business will need to be registered for a withholding account (only) in the employee’s home state. This will allow your company to withhold and pay income taxes on their behalf. You can find more information about state registration in the article linked.

Labor laws and compliance in the new state

When hiring a remote employee, you’ll need to follow the pay and labor laws in the state where they are—which could differ from the laws in the state where your business is located. 

Here are some considerations to familiarize yourself with for each employee that works in another state, so you stay compliant:

  • Minimum wage: you’ll need to pay your workers at or above the highest minimum wage. Learn how to make a compensation change in Gusto here.

  • Overtime: learn when you’ll need to pay overtime to your employees and at what premium rate (e.g. 1.5x the regular rate). 

    • Some employees are exempt from overtime but state and local laws vary, so be sure to check when the employee will be eligible for overtime and how much to pay him or her.

  • Pay frequency: determine payday (frequency) requirements in the new state.

    • Some states only allow semi-weekly or monthly payroll, while others also allow weekly and bi-weekly payroll. Additionally, some states have payday requirements based on the work your employee does. 

    • If your pre-existing payroll frequency isn’t allowed in a remote worker’s state, you’ll need to follow the payday laws in that state. Learn how to set up pay schedules in Gusto

  • Final paycheck rules: there are state-specific rules about how a regular paycheck or final paycheck should be delivered–you’ll need to deliver your employee’s final paycheck within the timeframe dictated by their state laws and this timeframe may vary if your employee quits or is terminated. 

  • Meal and rest breaks: every state has laws about how many paid and unpaid breaks you need to provide employees. Be sure you communicate these laws to your employees and provide the mandatory break periods. Learn how to set up meal breaks in Gusto.

  • Disability insurance: withholding money from employee’s paychecks for state disability insurance is required in five states–California, New Jersey, Rhode Island, Hawaii and New York. If your employee works in California, New Jersey, Rhode Island or Hawaii, this is taken care of by Gusto. If your employee works in New York, you can elect for Gusto to withhold this, but you’ll have to remit the payments to the agency directly. Scroll to the “State Disability Insurance (SDI)” of this article to learn more.

  • Workers’ Compensation Insurance: requirements can vary by state, industry, and the size of your company. Check out our blog to learn about workers’ compensation and review state-by-state requirements. When ready, learn how to set up your workers on Gusto.

Hiring remote contractors

While hiring a remote contractor is generally less complicated than hiring a remote employee, misclassifying an employee as a contractor could lead to serious tax penalties. Before hiring a new teammate, check out our blog article on the difference between employees and contractors.

Once you’ve hired a remote contractor, you can pay them with ease in Gusto

Payroll, benefits, HR and more.