Whether we’re in the midst of a global pandemic or not, you’ve probably been thinking about creating a more flexible work environment. In fact, there are a LOT of reasons to consider remote employees–and we would know! Revel is a virtual practice and our team works from remote locations across the country. What benefits does this create for us that you can access as well?
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Rapid growth: It lets us add on new people quickly without worrying about getting physical space for “chunks” of people. We don’t have to anticipate that capacity and get a new office that is more than we need today, but will be right-sized a year from now. We grow one person at a time.
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Access to the best talent: We also aren’t limited to recruiting from the local talent pool only. We get to recruit and hire talent from anywhere in the country. And often those most talented employees are seeking the flexibility to at least partially work remotely, if not fully. So we have a broad reach, but also some great lifestyle benefits to throw their way!
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Access to the nontraditional workforce: Part of building diverse teams means accessing groups of workers that might otherwise have a difficult time making it into the office for a traditional 9-5. We can work with single parents, folks without transportation, etc, and build a team of highly skilled people that appreciate our flexible schedule.
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#workfromanywhere: Once you’ve had a taste of the life (meaning taking a week of meetings and calls from a cabin on the lake or a chair next to a pool) it’s hard to want to go back to the traditional office setting. This benefit gets enjoyed throughout the whole organization.
But odds are good that if you found this article, you already decided to hire that employee in another state. So you don’t need more convincing–you just want answers to questions like:
Do I pay them directly or through a PEO?
Will I have to register my business as a foreign entity in that state?
What other tax registrations will I need to complete in order to get this person on payroll?
So let’s help shed light on what this experience is like. It’s not as painful as you might think, though if you’re going to do things right it might take a little paperwork. Remote employees are becoming more and more common, and the trends and surveys indicate this isn’t just a temporary phase. So let’s outline the things you need to know when you’ve hired an employee in another state:
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Employee vs Contractors: Independent contractors aren’t the subject of this article. If you have a contractor working for you in another state, most of the time there isn’t much of any obligation beyond paying them and issuing them a 1099 at year-end. But just to be safe, check the rules of that particular state, as some do have obligations for contractor pay in certain cases. But the rest of this article will focus on “common law” “W2” type employees.
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Foreign Entity Registration: In almost every state, having an employee of any regular status will meet that state’s threshold for nexus and registration as a foreign entity doing business in that state. So if you formed your LLC or Corporation in Texas, but you have now hired a remote employee for 30 hours a week in Pennsylvania, you have to apply to the Pennsylvania Secretary of State for registration as a foreign (meaning from outside PA) entity transacting business in that state. The filings vary from state to state, but usually aren’t very complicated. They’ll require paying a fee, and will also require you to file regular reports confirming you intend to stay operational there. If you need, you could ask your lawyer or accountant to help you with this.
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Does registering as a foreign entity operating in that state mean I have to pay income taxes to that state? Not necessarily. Economic nexus for income tax purposes is defined differently than it is for registration as a foreign business entity. So it’s best to review this with your accountant, who can advise you about whether the specific activities going on in that state constitute the need to file income taxes there.
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Your Address: There’s no one best path to choose here, but your business will need an address in that state and for these various filings. You could use:
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Employee’s Address: If your employee is OK with it, you can use their address as your company’s local address in that state. Upsides: costs you nothing, available immediately. Downsides: if the employee parts ways with you they might not be motivated to forward your mail, their personal address could get published in a publicly accessible way connected to your business, and you’ll have to rely on them to send you messages in a timely manner.
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A Registered Agent: Registered agent offices are typically used for foreign entity registrations ONLY, but some of them DO allow for use of the address for general mail as well (this is usually an extra fee). So if that works for you, you can use their address for all correspondence and they’ll often scan and email you anything that comes their way.
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UPS Store: USPS boxes aren’t the way to go as they don’t constitute a physical address in most cases. But a UPS Store mailbox will, and is often a very affordable way to create a local address somewhere. They will also allow options for saving your mail or forwarding on to your home location.
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Other Payroll Tax Registrations: In addition to the foreign entity registration, your business will often have to register with two additional groups in that state: the state department of revenue, and the unemployment insurance department. Registration with each of these two agencies is necessary to obtain account numbers for income tax withholding and employer-paid unemployment taxes. You’ll need both of those account numbers before you’ll be able to register that employee and state in your payroll system.
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Important note: It is NOT OK for you to withhold income tax in your state when your employee is living and working in a different state. Your business has to register with that state’s department of revenue for a withholding tax account number and collect, file, and remit withholding taxes to that other state. We see employers (especially those new to hiring remote workers) get this wrong all the time.
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Is it just easier to use a PEO? That’s a complex question, as using a PEO carries with it a lot of different impacts. We’ll have to save the full discussion for another post. But just know for now that if your business plan calls for rapid growth and hiring across a lot of the 50 states in the US, you might gain a great advantage by using the existing registrations these PEO services have in every single state so you don’t have to get them yourself. On the whole, however, we often recommend our clients set up their own registrations and employ their people directly because of the greater degree of control they have in that case.
There’s a lot to be aware of when hiring a remote employee that’s working in another state. But by taking just a few right steps early in the process, you’ll save yourself (and the employee) a load of problems down the road. Good luck and keep growing!
